Commentator – Thom Bentley, Client Director- Institutional
Q1: What’s driving the recent market volatility?
Markets dislike uncertainty. Among the issues contributing to equity market volatility at the end of 2018 were worries about the US/China trade war, political uncertainty in Europe around Brexit, and concerns about the global economy slowing.
Q2: How long do you think it will continue? Why?
Volatility has already abated significantly. The VIX index (which measures US equity market volatility) rose from a level of 11.6 at the start of October 2018 to a peak of 36.1 on Christmas Eve 2018 (a rise of over 300%). Since then it has fallen back to 14.7, indicating that the market is much more relaxed about the outlook than it was a few weeks ago. The market believes the US and China will settle their trade dispute, and corporate earnings have been supportive for equities.
As always there are uncertainties, including Brexit and the slowdown in European economies, but for the time being the markets are more sanguine about these potential issues.
Q3: Is volatility – especially if it is sustained – better for active management strategies rather than passive? Why
We see volatility as part and parcel of investing in shares. Over the short term, high volatility is a risk for all share investors regardless of whether they’re active or passive, because it means investors may not get back what they put in.
However, over the long term assets with low or no volatility (such as cash) are the most risky, since they provide very little (if any) return after inflation.
Investors benefit from volatility in both active and passive strategies in the long term. Volatility means the prices of shares rise as well as fall, and historically share markets have risen more than any other asset class over the long term.
Most of the return delivered by active equity managers is simply the return of the market, even if the manager is very good. This market return can usually be acquired at a far lower cost by investing through an index-tracking ETF.
Q4: How does your investment process define and manage volatility?
Our objective is to give investors the return of the market with low fees. Over the long term, volatility is part of what makes equities an attractive asset class, so we don’t believe it’s necessary or desirable to manage it.