Managers seek ways to tackle persistent volatility
Ladies and gentlemen, fasten your seatbelts. Current market volatility is expected to persist. From August to mid-September investors’ near-term expectations of equity volatility, as measured by the Chicago Board Options Exchange Vix index, was over double its average reading of June and July. It breached 40 five times, hitting levels not seen since early 2009.
Furthermore, the 18.3% realised volatility of global shares by 31 August this year was a figure exceeded in only three years of the preceding decade.
Tim Haywood, co-manager of three Julius Baer absolute return bond funds, said in late August: “The current market environment feels like the fourth quarter of 2008,
but at about one third of the intensity, [amid] macro fears and equity market swoons.”
Volatility may “throw up the bargains”, to quote economist John Maynard Keynes. But Michel van der Spek, senior fund analyst at Rothschild Private Banking & Trust,
says, “most investors dislike, and are averse to, losses: in the heat of a crisis, long-term forecasts provide little comfort.”
Summer’s low trading volumes haven’t helped. Neil Dwayne, CIO Europe, for Allianz Global Investors’ RCM unit said even before summer the liquidity in markets was half normal levels, at best. Volatility was magnified by junior traders reacting nervously to headlines and rumours, and European government intervention.
“There is a strong behavioural element in markets right now, which are anchored by their most recent events. These are all negative, so people can think the world is coming to an end. That kind of behaviour can produce significant volatility, and large risks,” says Nicolaas Marais, Schroders Investment Management’s global head of multi-asset investment and portfolio solutions.
While MSCI calculates equities contribute up to 90% of risk in traditional allocation models, it is not only shares that have been volatile recently.
Christian Hille, DWS Investment’s co-head of multi asset overseeing €8bn, says the volatility of Treasuries – historically a calm harbour – has been at “an all-time high”. And gold’s climb since August has certainly not been smooth.
Investors are “increasingly frustrated with the amount of volatility in their portfolios, and the effect that is having on their overall funding volatility,” says Susanne Willumsen, director and portfolio manager on Lazard Asset Management’s Global Controlled Volatility fund.
Volatility has usually signalled falling markets. “On average, the correlation has been negative. Higher market volatility has gone along with negative returns,” says Frank Nielsen, MSCI’s executive director of research. Since 1974 this correlation has fallen as low as -100%. It only once breached +60% in a strong-yet isolated case of high volatility in rising markets in the late 1970s.
The bumps are not over yet, says DWS’s Hille. “Crises are coming with increased frequency, and it appears the number of safe assets is reducing to just one or two –
and everyone wants to get into them. That means at the moment, volatility has suddenly increased, even in presumably safe asset classes.”