This summer, like a bolt from the blue sky, volatility returned to equity markets. In early August, weaker than expected US job figures ignited fears that the US Federal Reserve (Fed) may have left cutting interest rates too late to avoid economic slowdown. Anxiety about the US economy spread like wildfire. The VIX index (sometimes known as the “fear index”) spiked up. The fact that the Bank of Japan had just raised interest rates was partly why that country’s market was especially volatile. By mid-August, many markets had staged a partial recovery. But the lesson is clear, lest we forget: equity markets can behave in an erratic and unpredictable manner. Storms can burst from a seemingly clear sky.

 

Nor is volatility likely to be a temporary phenomenon, in our view. Looking ahead, risks of all kinds abound. There is uncertainty about the world economy and the future path of interest rates. Geopolitics is another source of risk. The ongoing war in Ukraine raises the spectre of regional escalation. In mid-August that conflict took a surprising turn when Ukrainian forces invaded Russian territory. In the UK, anti-immigration street violence broke out across dozens of towns and cities, stoked by false information spread on social media. One of the risks of Donald Trump’s being elected US president in the election scheduled for 5 November 2024 – though less likely now that Kamala Harris has replaced Joe Biden as his opponent – is that the US becomes isolationist, allowing Russia’s president Vladimir Putin to expand his territorial ambitions, perhaps lunging towards the Baltics. A risk of Trump’s not being elected is that he refuses to accept it as a fair result, and his followers take to the streets.

 

We cannot predict the future, and that precisely is the point. Investors need a way of allowing the potential for positive returns, while dampening down much of the risk.

 

When equity markets correct sharply downwards, it makes little difference to investor outcomes that they were in a fund that slightly outperformed its benchmark. Market falls drive all before them. Modest outperformance of an index makes small odds compared to the size of a serious market correction. Similarly, fees saved by investing in passives will not help investor outcomes much, when volatility strikes in earnest. Index trackers fall along with the market; they are designed to do just that. In fact, it is worse than that: an index fund tracking a market cap-weighted index will fall more than an equal weighted fund, if the fall is worse in bloated mega caps. 

The benefits of neutrality

There is an alternative. A market neutral approach seeks to avoid the directionality of markets. It does this by holding a long book and a short book in balance. A market neutral strategy seeks to generate returns from alpha, not beta. In a down market, the short book may make a positive contribution even if the long book is negative. Similarly, in an up market, the long book may make a positive contribution even if the short book is negative. When one book is positive and the other negative, the relative difference between them determines the strategy’s return.

 

The returns of the Jupiter Global Equity Absolute Return (GEAR) Fund (I USD Acc), which we manage in the Jupiter Systematic team, have, since its launch on 30 June 2009, to 30 June 2024, exhibited a correlation to the MSCI World NR USD of -0.10. It may seem surprising at first sight that a strategy invested in global equities has behaved very differently from that asset class. This is due to its market neutral approach. Its correlation to the JPM GBI Global TR Hdg USD index was the same, slightly negative at -0.10. So, it has low correlation with bond markets too1.

 

Furthermore, GEAR has a target volatility limit of 6%, much lower than that of global equity markets. Returns with low correlation to markets, and with low volatility, have tended to increase diversification when added to a portfolio of traditional equities and bonds.

 

So how do we achieve alpha? Our investment process has five stock selection criteria, all of which are based on sound investment principles, and all of which are diverse from each other. These five principles have been deeply studied and are tried and trusted: Dynamic Valuation (which takes into account quality as well as value), Sustainable Growth, Company Management, Sentiment, and Market Dynamics. We are continually studying and testing these methods of stock selection, and regularly introduce refinements to them after thorough research.

 

So, when preparing for the next bout of market volatility, bear in mind that there are alternatives. Don’t get caught out in a storm.

1Past performance is not a guide to future performance. Source: Jupiter as at 30.06.2024.

Investment risk – whilst the Fund aims to deliver above zero performance irrespective of market conditions, there can be no guarantee this aim will be achieved. Furthermore the Fund may exceed its volatility limit. A capital loss of some or all of the amount invested may occur.

Company shares (i.e. equities) risk – the value of Company shares and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions.

Stock Connect risk – the Fund may invest in China A-Shares through the China-Hong Kong Stock Connect (“Stock Connect”). Stock Connect is governed by regulations which are untested and subject to change. Trading limitations and restrictions on foreign ownership may constrain the Fund’s ability to pursue its investment strategy.

Currency risk – the Fund is denominated in USD and may use hedging techniques to try to reduce the effects of changes in the exchange rate between the currency of the underlying investments and the base currency of the Fund. These techniques may not eliminate all currency risk. The value of your shares may rise and fall as a result of exchange rate movements.

Derivative risk – the Fund uses derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.

Sustainability Article 8 – Investments are selected or excluded on both financial and non-financial criteria. The Fund’s performance may differ from the broader market or other Funds that do not utilize ESG criteria when selecting investments.

 

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.

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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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An investment constitutes the acquisition of shares in the sub-fund, not in the sub-fund’s underlying assets. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. This communication is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the shorter term. Past performance is not a guide to future performance. Company/Holding/Stock examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. Awards and Ratings should not be taken as a recommendation. Every effort is made to ensure the accuracy of the information provided but no assurance or warranties are given. This is not an invitation to subscribe for shares in the Jupiter Asset Management Series plc (the Company). The Company is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. The sub fund may be subject to various other risk factors, please refer to the latest Prospectus for further information. Prospective purchasers of shares of the sub fund of the Company should inform themselves as to the legal requirements, exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile. Subscriptions can only be made on the basis of the latest Prospectus and the Key Information Document (KID/ Key Investor Information Document (KIID), accompanied by the most recent audited annual report and semi-annual report. These documents are available for download from www.jupiteram.com. The Manager may terminate marketing arrangements. Information on sustainability-related aspects is available from www.jupiteram.com.