Cover Story
[ VOLATILITY ]
10 / 11
you have lost a lot of time and returns
by doing that.”
The lost decades
The real problem is market slumps
can last a lot longer than 10 years.
An article published earlier this year
on FE Trustnet showed there are 11
sectors in the IA universe that have
seen periods of 10 years or longer
where they were still in negative
territory. IA Japan topped the list:
investors who put their money into
the sector at its peak at the end of 1989
would still have been sitting on losses
more than 24 years later.
Yet in most of these cases, the problem
was less about volatility and more
about investing in grossly overvalued
assets. And with the traditional
instrument for dampening volatility –
bonds – looking the most overvalued of
the lot, this has turned traditional risk-
management models on their head.
The “real beauty” of equity markets
A willingness to accept
volatility is one of the keys
to the outperformance of
the Edinburgh Worldwide IT,
whose gains of 367.79 per
cent over the past decade
are almost double those
of its IT Global Smaller
Companies benchmark. The
trust’s manager, Svetlana
Viteva, who invests in
immature growth companies
that have the potential to
become the winners of the
future, says the “real beauty”
of investing in equities is the
FE TRUSTNET
highly asymmetrical return
profile they offer.
“It is inevitable when you
own a portfolio of immature
companies that some of
them fail, but just a handful
of our top performers
more than offset that,” she
explains.
“It is about being long-term
owners of the shares and
investing for growth.”
The manager says this
long-term approach,
ignoring temporary
setbacks, is vital for
accessing companies that
disrupt existing markets
and change the established
way of doing things. Such
businesses are not built
overnight, she adds.
“There is such a
disconnect between
the real world and how
financial markets judge
companies on their
ability to deliver smooth
operational performance
quarter in and quarter out.
Progress doesn’t happen in
a linear fashion.”
With the traditional instrument for dampening volatility
– bonds – looking the most overvalued of the lot, this has
turned traditional risk-management models on their head
“A waste of capital”
David Coombs, head of multi-asset
investments at Rathbones, uses some
government bonds in his lower-risk
portfolios as a hedge against short-
term headwinds. However, the only
asset he holds in his most aggressive
funds aside from equities is cash, “and
that is waiting to go back into equities”.
“I am not invested in emerging
market debt, high yield bonds,
commercial property or investment
grade bonds, because at the moment
I don’t see any return for the risk I am
taking,” he says.
“That fund should be fully invested
at all times and usually is, but I
am not because of where we are –
markets are a bit toppy,” he adds.
“But there is nowhere else.”
Coombs adds there is a chance
equities may not be that “toppy” after
all. While global P/E ratios look high,
this is only one measure of value – for
example, he says the reverse yield
gap of around 3.5 per cent on UK
equities and gilts would have been
“an absolute bull signal to pile into
equities” when he started investing.
“I don’t know where it ends. If this
continues for the next two years, a lot
of financial models will break. If rates
are negative and central banks move
away from limiting inflation to trying
to generate inflation, then equity
markets might look really cheap.”
Morris recently sold down long-
dated bonds in his AHFM Total
Return fund, saying the long-term
prospects for these assets are “crazy”.
Instead, he is more optimistic about
undervalued areas such as emerging
markets and the UK in the long run.
“You have to look over the hill and
prepare for the next cycle, which will
be things that look a bit smelly at the
moment,” he adds.
Such areas may represent a good bet
in the long-term, but with the issues
responsible for their undervaluation
a long way from being resolved, you
can be sure any realisation of this
value will be accompanied by one
thing: volatility.
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