Edition: December 2015 / February 2016


Gaining stability in times of volatility

Global stock markets have been relatively stable for some years, but 2015 has seen a significant increase in levels of unpredictability. Although the markets started the year well, volatility has increased steadily, causing high levels of discomfort for some investors. We asked Liberty Corporate’s Investment Servicing Manager, John Taylor, why we are we seeing such extreme market swings and what investors can do about it.

What is market volatility?
Market volatility is unpredictable and vigorous changes in price within the stock market.

A combination of concerns

Several factors have led to the current level of volatility being experienced by global markets. From the threat of Greece’s exit from the Euro earlier this year, to concerns about the fall of China’s stock market and the impact that has had on the country’s currency and its growth prospects.

“The volatility is very widespread,” says John. “There is a lot of volatility in Chinese share prices which is making global share prices, including the JSE’s, quite erratic. There is also a lot of concern about what interest rate increases in the United States might do to global bond markets and exchange rates and that has had a major impact on the rand, amongst all emerging market currencies. Added to this, markets are being spooked by concerns that many shares have become too expensive compared to their earnings potential.”

For investors, volatility means uncertainty – and when it comes to share investments that means higher risk and less predictable returns, especially over the short term.

Taylor . . . extreme market swings

Investing in a volatile market

Market volatility can result in unnecessary panic. Rather than overreacting to short-term news and market changes, investors need to stay focused on their long-term investment objectives.

“Volatility is a double-edged sword,” says John. “ For investors putting away savings every month, it can help with buying assets more cheaply from time to time. This is known as rand-cost averaging. But when it comes to investments, if a lump sum is invested or withdrawn in a volatile market, there is more uncertainty around the actual value of the assets which will be realised and this can result in wealth destruction.”

Making the right investments can help improve returns and reduce exposure to volatility. “We believe that adopting a diversified approach across major asset classes, accessed cheaply to reduce the impact of fees, and avoiding the impact of large capital losses can result in better investment returns over time for investors,” says John. “A great way to do this is by investing in the Liberty Stable Growth Fund.”

Achieving stable growth

One way for investors to reduce volatility in their portfolios is to invest in the Liberty Stable Growth Fund. This is an absolute return fund which aims to generate inflation-beating returns (CPI + 5%) over the medium term and avoid the impact of larger market drops.

“The Liberty Stable Growth Fund is designed for investors who are concerned with day-to-day market volatility, particularly the risk of large losses over shorter periods of time,” says John. “It is aimed at those investors wanting to earn returns of at least 5% in excess of inflation over time.” He adds that investors with more than three years to invest their money should do well in the portfolio.

The portfolio maintains a fairly aggressive long-term strategic asset allocation, aiming to limit short-term losses and deliver strong inflation-beating returns over time. The key benefit of investing in the Liberty Stable Growth Fund, says John, is the increased certainty of investment outcomes, as the volatility of returns is much lower than for most other similar investment options. The design of the portfolio also means it is significantly simpler and cheaper than most similar portfolios which are aiming for the same objectives.

Importantly adds John, “The Liberty Stable Growth Fund is one of the best positioned portfolios, in our view, for proposed changes envisaged by National Treasury in the retirement funding market. The portfolio avoids many of the pitfalls and concerns which National Treasury has picked out, such as inappropriate use of guarantees and excessive performance fees.”

What does the future hold?

The committee is the voice of the employer and its members. Liberty Corporate believes that current market volatility is set to remain as long as the US does not raise their rates; as long as commodity prices remain low; and as long as share prices remain as expensive as they are currently. Even once these conditions change, the volatility effect after years of easy money being pumped into global markets might take a while to wear off. Investors wanting to avoid this volatility would do well to consider the best investment options available to meet their needs.

About the Liberty Stable Growth Fund

  • The fund is an absolute return fund which aims to generate inflation-beating returns (CPI + 5%) over rolling three-year periods.
  • The fund has generated returns in excess of its own benchmark over all time periods to end August 2015.
  • It was the best-performing CPI + 5% fund over the past one-year period in the Absa Asset Consultants Survey for the month of July 2015. The portfolio delivered a return of 14.4% over that period relative to its average peer, which delivered 8.8%, the majority of them with higher volatilities.
  • The portfolio makes use of a combination of active and passive investment styles, using index tracking (or passive) building blocks to provide exposure to the market in order to reduce costs to investors. The asset allocation and protection applied is actively managed to ensure adherence to the risk and return objectives set for the portfolio.
  • The Liberty Stable Growth Fund provides downside protection with the ability to benefit from market upswings:
    • If a strong rebound in the market occurred, the portfolio would smooth the returns and initially be slower than some other funds to respond to the upward movement, but within a few months would catch up.
    • If markets moved downward sharply, the portfolio would initially move downward, but only to the point where the protection would kick in and compensate the portfolio for any further losses on the market. This means the possible loss to investors is limited.