Stock market volatility has come back in full force in 2022, with rising inflation, the ongoing Covid-19 pandemic and Russia’s invasion of Ukraine all weighing on investor sentiment and portfolio returns.
Each of these factors has substantially impacted investment decisions in the first three months of the year, with many major stock markets having fallen by more than 10% by the middle of March, while global fixed income indices are delivering negative returns on the back of rising interest rates.
Given the current economic backdrop and the sudden onset of frosty international relations, the broad expectation is that we have entered a new phase for financial markets. Persistently high inflation and rising interest rates have triggered a rotation out of high-growth sectors and towards value-orientated companies, while the war in Ukraine has jolted energy markets and created a broad sense of uncertainty in financial markets.
While risk management is always a fundamental part of managing investments, recent events have moved it to the fore.
Cut through the noise
In our multi-asset portfolios, we take a three-pronged approach to managing portfolios during times of uncertainty – cut through the noise, differentiate ‘trade’ from ‘trend’, and remain flexible.
With so much bad news in circulation, establishing which items are important, particularly from an investment perspective, is a pivotal aspect of our research and management process.
Similarly, understanding the difference between trade and trend is significant. Asset prices can deviate from the trend and move in more than one direction in the short-term. We believe it is important to stick to our trend position where we have conviction unless there has been a fundamental change in our view.
For example, interest rate hikes were coming before Russia invaded Ukraine and they will continue to prevail in the coming months. It is possible that fewer rate hikes will be required than previously expected, and this may not yet be reflected by share prices. The bottom line, however, is that markets were looking overvalued in places before the war and we haven’t changed our stance on that.
In many respects, risk management is often a case of foresight over hindsight, making investment decisions during periods of calm, but with future volatility in mind.
Maintain a long-term view
As long-term investors, we seek to avoid making short-term trades that could hamper future returns. Every investment decision in our portfolios, across all asset classes, is the result of thorough research and analysis. In our fixed income portfolios, every holding is deeply analysed by our dedicated, in-house credit research team.
Within fixed income specifically, our preference is to think as a buy-and-hold investor. This means selecting the right assets at the time of investment with the idea being that we will hold that bond to maturity.
Taking a long-term, top-down market outlook and complementing it with extensive bottom-up research can be a valuable strategy for generating returns over an extended period. Nevertheless, we know that this approach also requires the portfolios to weather the vagaries of financial markets over the short-term, particularly when global events cause significant downturns.
Know when to be defensive
During periods of market stress and high volatility, there is a real benefit to having the flexibility and agility to take a more defensive stance in portfolios to mitigate losses. In multi-asset portfolios, this may mean taking risk off the table by reducing the overall weighting in equities or high-yield bonds and increasing the weighting towards government bonds. It may also mean exiting positions in high-growth companies and sectors in favour of defensive sectors such as utility companies and consumer staples.
Being defensive, in our view, also means keeping an eye on liquidity, especially during periods when investors in our funds may be minded to move some of their assets into cash. We are constantly seeking to strike the right balance between being fully invested and holding cash and cash-like assets so that we can match potential outflows without negatively impacting returns.
It’s also worth noting that times of volatility can lead to investment opportunities. As stock markets shift and the overall economic and geopolitical landscape evolves, new opportunities are likely to appear. Stock market corrections cause share prices to fall substantially, which can provide a cheaper entry point for investing in certain companies.
This is why being proactive, as opposed to simply reactive, is an important part of our approach to managing risks as well as portfolios more generally.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.
No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/
LF Canlife Multi-Asset Funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Expiry date: 13/04/2023