Last week’s more than 4% drop in the S & P 500 wasn’t unusual. In the current quarter alone, the large-cap index has moved by a similar amount on seven occasions. How are professional investors trading amid such volatility, and what are they buying? Hedging bets Speaking to CNBC “Pro Talks,” Investment Director Neil Veitch of SVM Asset Management said he manages risk by being open to any strategy that offers the “best return.” One option on a “very, very short term” basis, according to Veitch, is an inverse volatility ETF (exchange-traded fund). These ETFs, such as the ProShares Short VIX Short-Term Futures ETF and Short VIX Futures ETF , allow investors to bet on a stable market in times of volatility. This is done by effectively shorting the VIX, a measure of volatility expectation based on S & P 500 index options. Some ETFs even use leverage, or debt, to amplify returns. Veitch, who manages about £200 million ($213 million) across three funds, also suggests another option to hedge against equities over the medium term: U.S. Treasury bonds. Historically, bond prices have tended to rise when stocks fall. They are considered safer than owning stocks. “Owning two-year U.S. Treasurys on 4% is as good a place as any for your cash at this particular juncture,” he added. Rampant inflation has driven the interest rate, or yield, on short-term U.S. government debt to 4.13% from 0.76% at the start of the year. Veitch believes the market is currently reacting to the “increasingly hawkish rhetoric” of the Federal Reserve and other central banks as they try to tame inflation. “The path of inflation and how central banks respond to it determine the path of markets over the short and short and medium term,” he said. Finding value If that’s the environment, how is Veitch finding value in stocks, and what is he buying? The investment director pointed to a handful of equities that have been “hammered” by concerns over consumer confidence. “With stocks down and in many instances by 50%,” said Veitch, who also manages the SVM World Equity Fund, “they are beginning to get more attractive.” Micron Veitch disclosed that he sold off shares of chip maker Micron Technology earlier this year. Shares of the semiconductor firm have fallen by 48% to $50 since January. The fund manager said the stock would be “interesting” if it falls to about $40 a share in the future. “I suspect the next earnings update from Micron will be poor,” he said. “It’ll be very interesting to see how the market responds if the shares fell off aggressively. I’d expect that sell-off to be bought.” JD Sports Veitch said London-listed JD Sports , a global sports apparel retailer, had a “very interesting medium-term story” as the company was expanding to the United States and Europe by targeting the “premium” segment. The Manchester, England, headquartered company, which operates over 2,000 stores across 19 countries, has seen its stock fall by more than 50% since its recent peak in November last year. SVM’s UK Growth Fund has allocated 2.8% of its portfolio to JD Sports. The fund manager said that select retail stocks would likely rise next year if inflation fell meaningfully. “It’s no point just selecting retailers across the board. We have to try and understand what the medium-term dynamic is, what their long-term earnings potential is,” he added.
