Q1: What’s driving the recent market volatility?
We would suggest that volatility is typically driven by uncertainty and often tends to reveal a shift in the underlying environment. With this in mind, the most likely drivers are the impact of a shift in policy from the Federal Reserve and the emergence of global trade wars following many years of globalization and falling tariffs.
Q2: How long do you think it will continue? Why?
Being stock pickers we don’t focus on forecasting volatility, but would observe that the FED is still continuing with its policy of quantitative tightening and whilst some agreement may be reached on trade tariffs between the USA and China, the deterioration in Global geopolitics will likely remain. Neither of these factors is conducive to a strong global economic cycle.
Q3: Is volatility – especially if it is sustained – better for active management strategies rather than passive? Why
Active management strategies are best judged through their ability to be a good steward of clients capital and to deliver superior returns than just owning the overall market. The Nikko AM Global Equity team only invests in businesses that over the long term will attain and sustain higher cash returns on investment. These businesses, which we describe as Future Quality, also have to have a strong franchise, management team and balance sheet, and an attractive
As highlighted previously the recent gyrations in markets are indicating that the economic tide is less likely to lift all boats from here, and particularly so if the volatility continues over a longer period. Instead, those with the most astute captains and the most flexibility are likely to better navigate more choppy waters. This should play well for the pillars that underpin our Future Quality style of investing.
Q4: How does your investment process define and manage volatility?
We have an investment process that is solely focused on an unrelenting pursuit of finding, researching and building portfolios of 40-50 future quality companies. In addition these portfolios are constructed by a very experienced team of portfolio managers and uses a very disciplined and differentiated process. When investing over a long term time horizon, volatility in how portfolios are managed is often the biggest headwind for delivering excess returns for clients. As a result we think it’s important to not focus on market volatility but instead on the consistent delivery of our Future Quality investment process.
These responses are issued by Nikko Asset Management New Zealand Limited (Company No. 606057, FSP No. FSP22562), the investment manager of the Nikko AM NZ Investment Scheme, the Nikko AM NZ Wholesale Investment Scheme and the Nikko AM KiwiSaver Scheme. This information is for the use of researchers, financial advisers and wholesale clients. This material has been prepared without taking into account a potential investor’s objectives, financial situation or needs and is not intended to constitute personal financial advice, and must not be relied on as such. Recipients of this information, who are not wholesale investors (in accordance with Schedule 1, Clause 3 Financial Markets Conduct Act 2013), or their duly appointed agent, should consult an Authorised Financial Adviser and the relevant Product Disclosure Statement. Past performance is not a guarantee of future performance. While we believe the information contained in these responses is correct at the date of presentation, no warranty of accuracy or reliability is given and no responsibility is accepted for errors or omissions including where provided by a third party. For full details on Nikko AM funds, please refer to our Product Disclosure Statements on nikkoam.co.nz.