The voice of reason in a noisy crowd

Conlias Mancuveni, FRM MSc MBA Head: Investments Research at Hollard Investments

In 2015 and 2016, SA equity markets (as measured by the All-share index), generated uninspiring total returns of 5.13% and 2.68% respectively.

Above average volatility, on the back of turbulent socio-economic and political times, was the common thread and, with uncertain election and referendum outcomes pending in Germany, France and the Netherlands – on top of the United Kingdom’s decision to trigger Article 50 - the impact of the rise in global populism and nationalism is likely to feature large.

Asking questions    

Looking at this global scenario, investors in retirement funds will (or should be) questioning what this means for their retirement savings and, what, if any, action they ought to be taking. 

However, decisions made in times of extreme vulnerability – such as switching out of underperforming funds - can be driven by panic rather than sound investment fundamentals and, here, the Hollard Investment team shares some of the principles it applies in volatile times:

Specialist investment advice vs self-advice
First off, we advise inexperienced investors against relying entirely on their own knowledge and instincts and recommend that they work with a seasoned financial advisor who can help them to understand their risk profile, and articulate their financial and retirement goals. 

Only then – once these have been balanced against their financial needs and circumstances, and an integrated financial planning exercise has been conducted – is it possible to identify, and select, the most appropriate retirement funds.

Response vs (over) reaction
When the unexpected shows up, markets often over-react and investors can be short-changed in the process. As every good fund manager will agree, the golden rule is “fundamentals over emotions” and, while this is always easier said than done, it’s helpful to remember that it’s fundamentals that are the actual drivers of long term asset

value. 

These typically play out over  three to five years and, in our experience, responsive investors find it easier to take the long view and align better with fundamentals, while reactive investors are more likely to be guided by emotion, with the risk that future retirement value can be left on the table.

Time in vs timing
Chopping and changing portfolios in response to market fluctuations and events is not recommended. 

Generally, investment managers who manage multi-asset retirement funds seek to add value by employing strategic asset-allocation (which anchors the portfolio to the long-term drivers of asset class returns), tactical asset-allocation (which acknowledges that prospective value of expensive assets diminishes and increases in cheap assets) and stock picking.  It’s all about strategically balancing ‘time in the market’ against ‘timing the market’ and it’s a complex business.

Risk profile vs best fund
Being in the “Best Fund” is every investor’s expectation but, unless there’s a fit with their risk profile, it doesn’t matter where the fund sits on a ratings chart.

Risk profiling involves considering the investor’s years to retirement, their knowledge of financial markets, their accumulated retirement assets, and their ability to tolerate capital drawdowns and should - ultimately - be an input to the balance of growth versus income assets in a client's retirement fund.  

Of course, as risk profiles change over time, so does the balance of growth vs income assets and our experience has shown us that this approach helps to manage client expectations better. 

A word on diversification
Some say the only free lunch is diversification  but in our view that only applies if the diversification of underlying investments is meaningful, i.e., if it involves continuous evaluation and decision-making on the different look-through risk exposures in relation to return expectations. (Risks include the diminishing ability of borrowers to pay back capital, sensitivity of income assets to interest rate changes, diminishing ease of investments disposal, massive currency movements and underlying managers’ unique risks.) Retirement funds that practise meaningful diversification are less likely to be impacted in very volatile periods.

So, while volatility certainly affects markets (and can influence investor behaviour), it isn’t necessarily the monster under the bed that it’s often thought to be.  With the guidance of a seasoned financial advisor, most ups and downs can be ridden out.  The real challenge for investors is ensuring they invest early enough to give themselves the best possible chance of a soft landing into retirement.