News & Insights

Options prove defensive in turbulent week

By Gary Reynolds

12 Oct 2018

Investment

It has been a turbulent week, the most turbulent since the spring, although it is difficult to pin the recent decline in share prices on just one issue. Brexit (at least for the UK and Europe), trade wars, withdrawing of quantitative easing, higher interest rates and geopolitical tensions were all blamed as being at least partly responsible for the mayhem of the last few days.

For nearly all of 2018 we have been using call options (the right to buy an asset at a pre-determined price) in our multi-asset funds as a means of taking exposure whilst protecting the downside in any market rout. As these calls were in place last weekend, the past few days have been a tester as to how well this strategy has worked.

The MSCI World index which represents shares in all the major global markets, declined -5.136% from 5th October 2018 to 11th October 2018 (ie., close last night). The FTSE 100 (including re-invested dividends) dropped -4.152% over the same period.

Our multi-asset funds were more defensive. Our Growth fund, which can invest 100% in equities, fell by -3.196%, whilst our Balanced Risk fund declined only -2.239%. Our Cautious Risk fund performed the best, which is what investors expect in falling markets, and dropped just -1.787%.

Lower share prices create buying opportunities and as we believe the fundamentals for equities are reasonable for the long term investor, we used yesterday as an opportunity to take extra exposure in both the UK and US markets. So far, and it is just a short period, that decision has proved beneficial.

The Investment Team will continue to monitor conditions and risks, which abound, especially in the UK where the Brexit negotiations are having an adverse effect on the volatility of both the pound and the share prices of British companies. Do remember, however, that opportunities often come disguised as risks and we will be actively seeking out such opportunities.

I am going to cover Brexit and the trade wars at our December client seminars, in the meantime, we will keep you posted with developments.

Gary Reynolds CFA Chief Investment Officer

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