You will no doubt have seen headlines on Friday and again today about a steep drop in stockmarkets.

As I write, the FTSE 100 is around 6,015, around 15% below the 7,104 level it reached on 27 April.

Whilst markets are substantially down and this does of course affect portfolios, it is worth reiterating that we don’t just invest in equities. For example, since the FTSE peaked our alternative equity and property funds have largely made money. Even some of our UK funds which invest in smaller companies have made a profit in this period.

As of close on Friday (21 August), our cautious model portfolio was down 2.68% and balanced was down 3.12% from 27 April after all fees.* At this date the FTSE was down 12.9% and the average managed fund, represented by the Mixed Investment 20%-60% Shares sector was down 4.25%. Adventurous portfolios which have more equity content were down 4.98% at the same date.

What’s happening?

The sell-off has been caused partly by worries about Chinese economic growth as well as a fall in their stockmarket. There is also the potential for the US to increase interest rates which has been occupying investors’ minds. These factors have all contributed to the recent market drops.

For more details on how China affects investments, see my latest article for Citywire here. I also covered the knock on effects of US monetary policy in the last newsletter which can be found here. 

For now we don’t believe this is an indication of anything more serious but of course we will watch this carefully.

What are we doing?

Those of you who have been clients for a while will not be surprised to know we are buying equities.

For most clients on the Nucleus platform we are buying an index tracking fund today. This has a daily dealing point of 12 noon and the FTSE was at 6,015 at this time.

We will likely sell this fund should markets recover 5% or more.

When markets were around 7,000 our portfolios were generally slightly underweight equity in most portfolios – they held less equity than usual. As the FTSE dropped below 6,600 we took this back to a “neutral” weighting with another index tracker purchase. 

After the most recent trade most portfolios will now be slightly “overweight” equities. This is how we typically react to market movements – selling on the way up to bank gains, and buying as markets drop to take advantage of lower prices. 

Of course the market could move further down from here and we are not trying to call the bottom. However, as we have mentioned in various briefings and newsletters of late, 10%+ falls in markets happen in most years whether the market ends the year up or down. Most of the time these are opportunities rather than having a long term detriment to portfolios.

If you should have any queries, please contact your usual Equilibrium adviser or client manager.

Past performance is not a guide to future performance

* Source: Financial Express Analytics, total return on a bid-bid basis. Assuming a 1.5% pa Equilibrium charge.

Market Briefing – 24 August 2015

Mike Deverell, Partner & Investment Manager