Three funds to profit from volatility

With the economic outlook still uncertain, 2010 promises to be another volatile year for risky assets. But volatility often brings opportunities, says professional investor Steve Waddington. Here, he picks three funds that should do well in unstable times.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week, Steve Waddington, fund manager at Insight Multi-Asset Group.

With the economic outlook still uncertain, 2010 promises to be another volatile year for risky assets. But volatility often brings opportunities. Our favoured investment themes include healthcare and absolute-return products, as well as interest rates and foreign exchange.

With rapidly growing populations in emerging markets and ageing populations in the developed world, healthcare is a key growth theme. Valuations are attractive, both relative to the rest of the market and in historic terms. Return on invested capital in healthcare is around three times the market average, so the sector traditionally trades at a market premium. When we bought in, however, the sector was trading at a 40% discount its greatest ever.

Healthcare stocks have lagged more-cyclical areas of the market in the past year and remain out of favour, given concerns over Obama's health reforms. But the most likely outcome is a set of benign reforms, leaving only insurers at a disadvantage. Meanwhile, the defensive qualities of healthcare stocks may come to the fore this year if risk aversion returns.

For a healthcare play, we like the Polar Capital Global Healthcare Opportunities Fund (tel:020-7227 2744). It has a concentrated portfolio, focusing on around 25-35 names of differing sizes, and has the flexibility to invest in all geographic regions, with a bias towards developed countries.

While risky plays are unlikely to continue rising at the same pace as 2009, I don't expect them to revisit previous lows. I do, however, see high volatility continuing, given the uncertainty about economic growth, monetary policy and the withdrawal of fiscal stimulus. So I favour actively managed absolute-return products those which aim to provide positive returns regardless of market direction. Their low correlation with other asset classes offers diversification benefits too.

One interesting example is the F&C Active Return Fund (020-7628 8000), which follows a diversified option trading strategy. The fund generates returns by exploiting mispriced risk in equity index and foreign exchange (FX) derivatives. Opportunities often arise here as market participants, such as large institutional investors and investment banks, aim to hedge out, or pass on, unwanted risks. In times of increased uncertainty pricing can become further distorted by fear, or, indeed, by technical factors. The fund has recently benefited from buying cheap dividend swaps as the market vastly over-estimated the extent to which companies would cut their dividends.

The past two years have seen several dramatic shifts in currency valuations. This looks likely to continue. The world's economies entered the recent crisis in unison, but recovery will come at varying speeds. These differences in rates of growth, inflation and interest rates are likely to continue to create opportunities within the FX markets. To capture this, we are invested in the Baring Absolute Return Global Bond Trust (0845-082 2479). The fund generates different global economic scenarios, assigning probabilities to each one. One major play is to buy the yuan against the US dollar. The Chinese have not let the yuan rise for around 18 months, despite concerted pressure from America. With limited downside and healthy upside potential, this trade looks very attractive.

Recommended

Four of the best funds for mining profits in gold
Gold

Four of the best funds for mining profits in gold

The gold-price upswing is set to endure, says Max King. These funds look the most promising.
13 Jan 2021
Venture capital trusts that offer growth, income and tax relief
Share tips

Venture capital trusts that offer growth, income and tax relief

Professional investor Alex Davies, founder of high-net-worth investment service Wealth Club, is a fan of venture capital trusts (VCTs). Here, he picks…
8 Jan 2021
I wish I knew what an investment trust was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an investment trust was, but I’m too embarrassed to ask

“Active” investment funds come in two main varieties, one of which is investment trusts. But what exactly is an investment trust?
5 Jan 2021
Six investment trusts to tuck away now – and six to sell
Investment trusts

Six investment trusts to tuck away now – and six to sell

Max King presents his round-up of the “lame ducks” of 2020 and highlights six “Cinderella” trusts: strong performers that have not received the recogn…
29 Dec 2020

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to