With all the disconcerting news swirling around, it is easy to perhaps overlook deeper market and investment trends. A recent Breakfast Briefing in London examined investment trends.

The duration of the current bull run in equities is not necessarily freakish or suggestive that a correction is imminent although such a turn is probable, a Breakfast Briefing held by this publication recently heard.

A strategy to consider is tapping into the volatility risk premium of equities, gaining income while getting equity exposure in a defensive way, Christine Cantrell, sales director for exchange-traded funds, at BMO Global Asset Management, said.

Cantrell spoke at the event, held at the Carlton Club in the St James’s area of London, under the title of Peace of mind for equity investors: How can investors find solid returns when stock markets are vulnerable to directionless volatility?

Other speakers at the event were Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management; Jonathan Bell, partner, chief investment officer at Stanhope Capital, and Deborah Fuhr, the managing partner at ETFGI. Your correspondent moderated the panel discussion. BMO Global Asset Management sponsored the event.

UBS’s Yu opened the event by setting out his views on the broad financial market and economics outlook and recent past. After nine to 10 years of “emergency” action by central banks to reflate crisis-hit countries, there is a slow move towards “normalisation,” he said. “Central banks are positioned to hike rates because they are comfortable with global growth,” Yu said.

He said it was not possible at the current point whether investors should be very defensively positioned. In the case of UBS, it has cut some of its overweight stance on equities. “We want to be pro-risk but in the most defensive way possible,” Yu continued.

There are clearly a number of geopolitical risks at present, he said, citing examples such as North Korea’s military programmes, the Brexit process in the UK, or the push by some in Catalonia to break away from the rest of Spain. In the world’s largest economy, Yu said a talking point will be whom President Donald Trump selects to be the next Federal Reserve chairman when Janet Yellen’s term of office comes to an end. (Yu spoke prior to President Trump’s choice of Jerome Powell as new Fed chairman, and he is seen as a continuity figure, following the broadly same approach as previous chair, Janet Yellen.) More positively, if US corporate tax reforms, including a repatriation of US corporate earnings from overseas, come to pass, then this could bring in trillions of dollars to the US and boost the economy. In such a case, the US could surprise on the upside, Yu added.

Panel discussion
Stanhope’s Bell said his firm is overweight European equities, but in general he struck a relatively cautious, if not pessimistic, tone on how he sees the investment picture unfolding. “I am concerned that at some point wage inflation will pick up and that will be the catalyst that pushes bond and equity prices down,” he said.

“I think people are particularly complacent at the moment….that’s not unusual for a bull market!” he continued. “There’s always the possibility of a market setback of 20 per cent or more tomorrow.

“I have had some cash in my portfolios for too long but hope that when there’s a setback I’m a buyer rather than a seller.”

A process of central bank and policymaker normalisation will “take a long time to play out,” BMO’s Cantrell told delegates. “It is likely that volatility in the markets will rise from these low levels so our team is monitoring the potential catalysts,” she continued.

ETFGI’s Fuhr said behaviour as seen from fund inflows and outflows suggested investors are holding on to a certain level of cash. “Many investors are going into gold,” she said. There has been something of an exodus out of certain hedge funds. There is still inflow into factor-based funds (aka “smart Beta”), as well as growing interest in ESG-themed investments, she said.

Asked about the often-discussed shift in asset management towards “passive” from “active” funds, BMO’s Cantrell said there is definitely a move going on and that it is not driven solely by low cost but also by a changed mind-set about what investing can achieve.

In the first eight months of this year, there were more inflows to index funds such as ETFs than for the whole of 2016, suggesting the appetite for passive investing is clearly strong, ETFGI’s Fuhr said.

“People are seeing research that paying less [for funds] improves performance over time,” she said, adding that she dislikes the term “passive” because it implies the investor isn’t doing anything. She prefers use of words such as “index” instead.

Cantrell spoke about her own firm’s products, such as a move to earn income in a volatile equity market through a covered call strategy. The covered call option strategy, (also known as a buy–write strategy), is put to work by selling a call option contract while owning an equivalent number of shares of the underlying stock. “We find that this is exactly what clients wanted from a low-cost diversified fund,” Cantrell said. It is worth noting that the implied volatility shown in option prices typically is higher than volatility in reality, creating a clear opportunity for investors to exploit, she said.

Stanhope’s Bell said his firm has got out of holdings of high-yield bonds. As for equities, it still possible to obtain income-generating equities; in property, an investor must be very selective, given the squeeze on yields. There are opportunities overseas, however, such as German real estate, he said.

Fuhr noted that investors are interested in areas such as currency hedging and capturing currency-related shifts, particularly as the cost of executing on such views is becoming cheaper. 

The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may get back less than the original amount invested.

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