How to Make Money When Market Volatility Rises

Oyster Continental European Selection fund manager Mike Clements is preparing his portfolio for a rise in market volatility

Emma Wall 11 August, 2017 | 3:35PM
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Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I am Emma Wall and I'm joined today by Mike Clements, manager of the OYSTER Continental European Selection Fund.

Hello Mike.

Mike Clements: Good morning.

Wall: So firstly, I should congratulate you on your strong performance, 25% last year, 13% year-to-date.

Clements: Thank you.

Wall: What has driven that outperformance?

Clements: There's been a number of things, I think. I mean, firstly, in the Continental European Selection Fund, of course, we are buying European companies ex-UK. So, these are European assets, and with the weakness of the pound that’s the driven the overall market up in sterling terms. But if you step back and just look at where the European stock market is, it's in a good place.

The European market is strong and that’s because European economy is strong. If you look at the GDP forecast, you look at unemployment indicators, they are not fantastic, but they are not disastrous either, and they are going in the right direction. That coupled with the fact that some of the political risks we saw probably 12 to 18 months ago have receded. I think it's led the market going higher.

Wall: And how much of it is just down to the sentiment of investors thinking, you know what, with the US looking toppy, let's take our money out of there and put it into Europe?

Clements: There is some of that, if you look at the fund flow data. There is money starting to come back into European equities. Now of course a lot of that’s going to passive and into ETFs and that’s fine. But also, active managers such as myself are seeing inflows as well and that’s starting to drive the market and we agree with that. You know the European market is a good place to invest, on a long term view you know valuations are reasonable and the quality of the companies you get are good.

Wall: And I suppose the next question would be fantastic for those people who have been invested with you for the last 18 months. They have seen the benefit of those factors you've just talked about. What about looking forward? Can we expect the rally to continue both in terms of fund performance and the underlying market?

Clements: Well, it's very hard to say in terms of the underlying market. But I still think that’s something to go for at the market level. For a stock picker like me one of the advantages I have is there is always something to invest in. I have a very concentrated portfolio of only about 30 stocks and have a universe of about 3,000 stocks. So, there is always something out of favour and some angle to take and some way to make money within the wider stock market.

Wall: So then where are you seeing those particular opportunities. Is it much a stock-by-stock basis or are there particular sectors that are still perhaps unloved by the wider market.

Clements: Not so much sectors, but there are certainly themes or parts of the market which we find interesting right now. We've been invested for some time in Italian financials but not the banks and so for example we’ve been playing and having access to ways to play the non-performing loan crisis in Italy. So, for example you own a company like Eurocastle or doBank which are very interesting plays. And we think that’s playing out nicely over the next three or four years and there is still lot to go for.

The other thing, which we think is quite interesting is, if you look around the markets at the moment you are looking for things which are out of favour. There is not lots of very obvious things. There's not whole sectors out of favor. Maybe energy may become more like that over the next three, four, five months if the oil price continues to be weak. But the only thing we can find which is interesting is volatility. Volatility is very low.

If you look at some of the volatility measures like the VIX or the VSTOXX, it's at multi-decade lows and what we've been looking for and what we've been putting to our portfolios are ways to play long term volatility picking up. So, for example we own a company like Flow Traders which is an ETF market maker or Deutsche Börse which is a German stock exchange. These are great ways to play this long-term theme of volatility increasing from historically low levels to something more normal.

Wall: Mike, thank you very much.

Clements: Thank you.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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