Are we in a bear market?

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Mitchell Fraser-Jones 29 January 2016 Est. reading: 5 min read

There’s been a lot of discussion about bear markets in recent days. With the FTSE 100 index closing on 20 January 2016 more than 20% lower than the all-time high it reached on 27 April 2015, it was indeed ‘technically’ in bear market territory for a day but has since rallied clear of that level for now.

It’s not exactly clear why 20% has been chosen as the point at which a ‘correction’ becomes a ‘bear market’. Nor is it clear exactly what has triggered the recent market reassessment but, even with the benefit of retrospect, it rarely is clear! China, oil, and the Federal Reserve’s recent interest rate increase look the most plausible explanations but valuation will have played a role too – some parts of the market have been defying gravity for a while. Regardless, it has been a rather grim start to the year for equity investors.

Although the UK stock market as a whole is not in a bear market currently, many individual UK stocks still are. We’ve had a look at some of the data for the FTSE All Share index as at close of business yesterday and, in actual fact, going by the arbitrary definition, even after the recent rally, over 40% of FTSE All Share Index stocks are still in bear market territory, having fallen more than 20% from their 52 week highs (see graphic below). Over a quarter of FTSE All Share index stocks are down more than 20% since 27 April 2015.

Infographic showing FTSE 100 over the last 12 months with an all-time high and multi-year low

By contrast, it’s worth remembering that some stocks can rise in value even in a bear market. The average stock is -21.1% below its 52-week high but more than a quarter of index stocks have actually risen in value since the market’s peak.

This is an important reminder of the need to be selective. As active fund managers, our funds bear little resemblance to the index and often behave very differently to it too.

Regular readers will be aware that we have been cautious on the world economy for some time and our portfolios have been built with this in mind.

Market sell-offs such as the one we have witnessed at the start of this year, however, tend to be indiscriminate. Whilst this can be frustrating in the short term, it can also provide opportunity. As such, when shares get cheaper without fundamental justification, our confidence in the funds’ long-term return potential actually increases! As Warren Buffett once said, “be greedy when others are fearful”…

What are the risks?

  • The value of the fund and any income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The ongoing charges figure is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the fund′s volatility and increase the level of indirect charges to which the fund is exposed
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund′s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

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