- Investment Insight
- 3 minute read
1. We are long term investors
The Covid-19 virus has now been declared a global pandemic and continues to cause significant turbulence in the markets. Current volatility, the amount by which market levels move up and down, makes for some alarming headlines with share prices falling yesterday by c10% and rebounding today – as we write – by a third of that amount. However, whilst we would remind clients that market volatility is normal, we acknowledge that current levels are extreme by any measure – most notably expressed through our clients’ understandable anxiety more than any statistical measure.
It has been easy to forget about volatility in recent years as it has been unusually subdued and, at the same time, we have experienced some years of super-normal returns. The markets may have arguably become complacent given this dynamic, but we have not. Indeed, the investment processes we use to build our portfolios take a long term view and account for markets that may occasionally fall significantly. Even with periods of sharp downdraughts, over the long term equities have historically provided attractive returns.
We would also remind our clients that timing markets is very difficult and that recoveries can easily be missed. Recent research* on the US equity market has shown that, over the last decade, 6 of the best 10 days in the market occurred within two weeks of the 10 worst days. While it is uncomfortable to be invested during declines, subsequent recoveries can provide a significant uplift to returns. We caution clients to hold their nerve and take a long-term view in the face of such volatility
2. Active management can outperform
It is at times of market volatility that active management comes to the fore. As active managers, we are able to flex portfolios in response to the evolving global situation. Markets may sell off indiscriminately – but we can opportunistically discern what to buy as frequent and sometimes opaque newsflow rattles investors.
At an asset class level, we can dynamically reduce our exposure to risk assets (typically equities), or assets in areas of the market that we feel are more vulnerable. Recently we reduced risk in order to give us the firepower to bargain hunt for those high-quality companies whose share prices have been sold down to very attractive levels. Our research capability allows us to identify those investments – whether shares, bonds or diversifying asset classes - that have been indiscriminately sold-off beyond our estimation of fair value and provide an unmissable investment opportunity.
3. Diversification is key
Periods of market stress also emphasise the importance of diversification within portfolios. By holding well diversified assets, at both a geographical and asset-class level, our portfolios experience a (relatively) smoother return profile because risk exposure is less concentrated.
This is a time for active managers to hold their nerve and take a long-term view in the face of record volatility in markets. At times such as these, we remain calm, dispassionate and discerning in protecting our clients’ financial wellbeing
*JP Morgan Asset Management - Guide to Retirement 2020.
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.