The pick-up in volatility that began in February continued into March with most major equity markets posting low single digit losses. Australian equities were amongst the worst performers dropping around 4% in local currency terms. All major sectors declined, with the more defensive sectors outperforming. This trend was also reflected in credit markets with credit spreads generally moving wider across the month. Bond yields drifted lower in March, but given the weakness evident in risk assets over the period, the rally was relatively modest. Despite trade war fears and equity weakness the US dollar recovered a touch in March, with the AUD losing ground. GBP also gained ground amid UK Brexit negotiations.
Category Archives: Investment insights
2017 was noted for its lack of volatility, and this can be seen strongly in the performance of global equity markets. For the first time, global equities (based on the MSCI ACWI’s 30 year history) saw a rise in every month of the year. The US market (S&P 500), while not posting a rise every month, saw a positive return every month once dividends are included, the first time since 1958. The largest fall for the US market intra year was 3%, which is the smallest intra year fall in any calendar year in the post war period.
Another area of note were signs of , most notably with the interest in cryptocurrencies. Bitcoin saw a rise of 1,300% and created billionaires of the Winklevoss twins, who were previously known for claiming Mark Zuckerberg stole their idea for Facebook. It was also reflected in the art world, with a world record $US450m paid for Leonardo Da Vinci’s Salvator Mundi, shattering previous records – over double the previous record for a painting sold at auction and a third higher than the highest private sale.
So after a record breaking year, it is worthwhile reflecting on what lessons we can learn from last year.
22% of people in pension phase feel underfunded, globally Funding retirement is at the forefront of many people’s minds, but how well are they preparing for it and how do those already in retirement feel about their situation? We spoke to over 22,000 people who invest from 30 countries around the globe about retirement to see if and how expectations differ from reality.
Implications of low return forecasts for Balanced Funds
The point of this note is to highlight the embedded shortfall risk in a typical fixed SAA investment strategy (e.g. the typical Australian balanced fund) should returns be low (and clustered) as we currently project.
Aggressive asset allocation within narrow ranges is also unlikely to solve the problem given the structural anchoring to equity market outcomes and the relatively narrow tactical ranges… this is an inherent structural flaw within the SAA model.
The practical implication is that this significantly limits the ability of managers of these types of portfolios to “turn the dial” sufficiently in an environment of compressed and clustered returns or where equity returns are moderate.
It is widely acknowledged that the outlook for economies and investment markets is unusually uncertain, given the huge political changes that we are witnessing across the world. It is also widely acknowledged that most assets are expensive and most likely are priced to offer sub-normal prospective returns. Why then is volatility (the VIX) so low? History tells us that periods of crisis are often preceded by periods of abnormally low volatility and complacency about risk and valuations. Are we in one such period?