Recent market volatility caused by US trade policy should lead investors to examine whether their portfolios are well diversified.
US President Trump’s “Liberation Day”, on Wednesday 2 April, was Liquidation Day for many investors, as they subsequently sold down shares, especially more expensive US equities. Although tariffs had been expected, they were harsher and more aggressive than anticipated. Business leaders were worried the tariffs will hurt companies, increasing inflation and disrupting international trade. Many economists said that an economic recession was more likely.
Then, on 9 April, investors were surprised a second time, when Trump announced a 90-day pause on tariffs for countries which had not retaliated. This caused a rebound in equities. He also announced a 125% tariff on China, which had retaliated. And a 10% tariff on most countries remains in force.
Markets and businesses need consistency from governments. In order to plan investments effectively, whether building a new factory, or developing a new product, companies need to be able to make confident forecasts about supply chains and economic conditions. For the last week, markets have been whipsawed by the vagaries of US trade policy. There may be more volatility to come.
The trouble with tariffs
The Trump tariffs were always a bad idea. Conventional economic theory holds that tariffs tend to reduce trade and dampen economic growth. As David Ricardo, the early nineteenth-century British economist, politician, and supporter of free trade, wrote1:
“Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole.”
And as Nobel laureate and economist Paul Krugman wrote more recently2, “If there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the principle of comparative advantage’ and ‘I advocate free trade.’”
The Trump tariffs made little sense in conventional economic terms. They were calculated using a simplistic formula based on the US’s trade deficit with the offending country. Their intent was to revive US domestic manufacturing industry, yet this will take many years, and heavy investment, to accomplish, whereas the pain inflicted on the American consumer (faced by higher prices of imported goods) is immediate.
Alternative asset classes
How can investors cope with market volatility and uncertainty like that during recent days?
“Diversification is the only free lunch in investing” is a quote attributed to Nobel laureate, economist Harry Markowitz, the creator of Modern Portfolio Theory. Diversification means not holding all your eggs in one basket. Holding different kinds of assets can help reduce portfolio exposure to any single risk.
Over recent years and months, many investors have been overweight US equities. A diversified portfolio should, in our view, have a wide spread of investments across various asset classes.
This means investors should consider broadening their portfolios beyond long-only equities and long-only bonds. They should consider alternative asset classes, such as market neutral equity, absolute return fixed income, and gold and silver.
An equity market neutral approach seeks to avoid the directionality of markets. It does this by holding a long book and a short book in balance. It 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. This means that returns can be uncorrelated with equity markets, providing the diversification that investors need.
A similar absolute return approach may also be applied to bond investing. A fixed income absolute return strategy can control risk through careful portfolio construction. A defined risk budget is used. Drawdowns can be minimised by managing near term volatility. Positive total returns are sought with stable levels of volatility compared to bond and equity markets. This provides diversification from bond markets.
Gold is a monetary metal, and arguably the true form of money. Gold has a classic role as a safe-haven asset in times of uncertainty and as a portfolio diversifier.
Market neutral equities, an absolute return bond strategy, and a gold & silver strategy, provide investors with alternative assets by which to seek to diversify their portfolios. In times like these, don’t be caught with all your eggs in one basket.
Sources
1 Ricardo, David. On the Principles of Political Economy and Taxation, 1817. Available at https://www.econlib.org/library/Ricardo/ricP.html
2 Krugman, Paul. Is Free Trade Passe? Journal of Economic Perspectives, vol. 1, no. 2, Fall 1987. Available at https://www.aeaweb.org/articles?id=10.1257/jep.1.2.131. See also Krugman, Paul. Ricardo’s Difficult Idea, 1996. Available at web.mit.edu/krugman/www/ricardo.htm
Jupiter Merian Global Equity Absolute Return strategy risks
- 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 (i.e. equities) 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. Other influential factors include political, economic news, company earnings and significant corporate events.
- Currency risk - the Fund can be exposed to different currencies and may use 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 the currency risk. The value of your shares may rise and fall as a result of exchange rate movements.
- 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.
- 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.
For a more detailed explanation of risks, please refer to the "Risk Factors" section of the prospectus. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.
Jupiter Strategic Absolute Return Bond strategy risks
- Investment risk - while the Fund aims to deliver above zero performance irrespective of market conditions, there can be no guarantee this aim will be achieved. Furthermore the actual volatility of the Fund may be above or below the expected range, and may also exceed its maximum expected volatility. A capital loss of some or all of the amount invested may occur.
- Emerging markets risk - less developed countries may face more political, economic or structural challenges than developed countries.
- Credit risk - the issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due. Bonds which are rated below investment grade are considered to have a higher risk exposure with respect to meeting their payment obligations.
- CoCos and other investments with loss absorbing features – the Fund may hold investments with loss-absorbing features, including up to 20% in contingent convertible bonds (CoCos). These investments may be subject to regulatory intervention and/or specific trigger events relating to regulatory capital levels falling to a pre-specified point. This is a different risk to traditional bonds and may result in their conversion to company shares, or a partial or total loss of value.
- Bond Connect Risk - The rules of the Bond Connect scheme may not always permit the Fund to sell its assets, and may cause the Fund to suffer losses on an investment. Interest rate risk - investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund.
- Liquidity risk - some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
- Currency risk - the Fund can be exposed to different currencies. 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.
For a more detailed explanation of risks, please refer to the "Risk Factors" section of the prospectus. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus. The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments.
Jupiter Gold & Silver strategy risks
- Investment risk - there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur.
- Sector concentration risk - the Fund's investments are concentrated in natural resource companies, and may be subject to a greater degree of risk and volatility than a fund following a more diversified strategy. Silver tends to outperform gold in a rising gold price environment and it tends to underperform gold when sentiment moves against the sector.
- Strategy risk - as the Fund invests in other collective investment schemes, which themselves invest in assets such as bonds, company shares, cash and currencies, it will be subject to the collective risks of these other funds.This may include emerging markets risk and smaller companies risk.
- Company shares (i.e. equities) risk - the value of Company shares (i.e. equities) 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. Other influential factors include political, economic news, company earnings and significant corporate events.
- Concentration risk (number of investments) - the Fund may at times hold a smaller number of investments, and therefore a fall in the value of a single investment may have a greater impact on the Fund’s value than if it held a larger number of investments. Smaller companies risk - smaller companies are subject to greater risk and reward potential. Investments may be volatile or difficult to buy or sell. Liquidity risk - some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
- Currency risk - the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
- Derivative risk - the Fund may use derivatives to generate returns as well as to reduce costs and/or 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.
For a more detailed explanation of risks, please refer to the "Risk Factors" section of the prospectus. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus. The net asset value of the Fund may have high volatility due to the nature of the asset class invested.
The value of active minds: independent thinking
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.
Important information
This marketing document is intended for investment professionals and is not for the use or benefit of other persons. This document 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. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI.