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Financial Market News – Sept 2015

InvestmentsNorthland086a8x121-150x150Financial markets have been very volatile over the last few weeks. As of last valuation (28 Aug), the global equity market was down 6.6% month to date (in New Zealand dollars). That follows a bumpy few months with China, Greece, Puerto Rico, oil prices and equity (share) market valuations among the main sources of worry.

We construct client portfolios knowing that we will have to navigate these periods. We aim to build in to each client portfolio sufficient “protection” to enable them to remain confidently invested, despite the prevailing turmoil.

That “protection” comes at four levels:

  • First and foremost, making sure that each client’s portfolio is suitably balanced between cash, income, inflation and growth assets, relative to their age, risk profile, income requirements and goals.
  • Second, ensuring that each of the underlying portfolios is constructed with an appropriate diversity of assets and management styles.
  • Third, actively managing the mix of assets and managers in each portfolio to reflect our view of the current environment.
  • Fourth, allocating to investment strategies (for example currency, credit default swap or option positions) and/or managers who we expect to perform strongly when the broader market may not be.

This recent period of volatility provided a useful test of our current portfolio construction relative to that “protection” goal.

To be clear, we do not think it is a realistic goal to eliminate downside – at least not without eliminating the potential for upside as well! Rather we are trying to make periods of volatility more endurable for our clients – so they remain invested and get to reap the compounding benefits of being invested over the long run.

So, how have we done? Our model client portfolios are down 0.5% – 1.3 % month to date, in an environment where pretty much every asset class is in the red for the month, some deeply.

After a very strong July the investment team actively positioned the growth portfolios with lower equity exposure coming into this latest bout of volatility. As the market has declined, and our downside managers have responded positively, it has provided a nice backstop to enable us to lift equity exposure and participate in the spring back that occurred late in the month.

Our absolute return managers who predominantly use a long /short equity approach – Suvretta and TT – are down around half the market which is about what we would expect in a very sharp selloff.

Our absolute managers with a broader investing approach tracked really well during August. Odey, after having a tough start to 2015, came into their own, up around 7% for the month. ISAM is also up strongly, around 6.5% for the month. Both of these managers fulfilled exactly the role we appointed them for.

In most of our inflation and growth portfolios we also hold a position with a downside manager called Universa. Universa is what is known as a tail risk manager. They use option strategies to construct a portfolio which will pay off when markets decline deeply (typically by more than 10%) and when volatility spikes.

While we are still waiting for final valuations we estimate Universa was up 160% in August. This means that a portfolio with a 1% allocation to Universa will have seen that investment more than double in value over the month and make a net 1.6% positive contribution to the portfolio return.

While commodities have been a drag on performance year to date, the remarkable month end rally in oil (up 25% in the last three days) means that our commodity exposure will end the month up, providing another positive offset to the decline in equity markets.

So while the downward move has been sharp, markets needed a blow out after an extended uptrend with little volatility to speak of. Our portfolio construction has enabled clients to navigate that period with very modest losses, enabled us to build further confidence in our team of external managers and provided an opportunity to reset the portfolios for the next leg.

Most importantly, despite dramatic headlines, which can unsettle clients, the performance of your portfolio has hopefully made the period reasonably comfortable for you.

Our regular review meetings ensure that each client’s portfolio is suitably balanced between cash, income, inflation and growth assets, relative to their age, risk profile, income requirements and goals. We will happily meet with you and revisit your portfolio balance if you are concerned about its suitability. After all, this is why you pay an advice fee.

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