29th April – In the COVID-19 era high volatility is the new reality but Rebecca Thomas, Chief Executive Officer Mint Asset Management, explains why investors need a steady hand in shaky markets.

In what looks now like an exquisite piece of market timing, the Financial Markets Authority (FMA) ‘active v passive’ debate on February 19 this year coincided nearly exactly with the historical peak of the NZX50.

The following day the benchmark NZ share index topped 12,000 for the first time – a height it sustained for just one more trading session before tumbling, slowly at first and then in rapid freefall, to the rock-bottom of about 8,500 on March 23.

Investors used to the generally placid conditions of post-GFC markets would be in for the shock of their lives. The March volatility, triggered by the coronavirus economic lockdown, marked a new extreme even for experienced professional fund managers. NZX share prices came unhinged during the 30 per cent descent from peak to trough.

In theory, times of heightened volatility throw up more opportunities for active managers as quality stocks often hit bargain basement prices. However, it is not as simple as just buying everything that appears cheap – especially with so many unknowns still around COVID-19.

Active managers need a strong investment process to maintain buy-and-sell discipline in erratic markets and understand risk. Passive investors, of course, do not require discipline – but they are exposed to risk whether they like it or not.

Time runs out for momentum

As leader of the, winning, active team in the February FMA debate, I made the point that investors need to focus on risk-adjusted returns rather than the nominal benchmark figures.

However, despite coming out ahead on the night, NZ active managers in general have been on the losing side of the debate over the last year or so.