Volatility a lesson in portfolio construction
Volatility is a given in the investment world, and, in the past few months investors have been exposed to several events that sparked short-term volatility. There were irregularities around corporate finances, sovereign events such as the ANC elective conference, and concerns around rising inflation in the US.
What can investors do in light of this volatility, and what should they bear in mind when it comes to managing their portfolios?
Volatility is part of the process
Higher inflation is a function of a healthy global economy and indicates global economic growth. As it stands, we are experiencing globally synchronised growth for the first time in four years — since the first quarter of 2014.
Volatility provides professional investors with opportunities to access markets at lower prices. Market corrections, usually defined as a fall of up to 10% in a stock or index, can return expectations to normal levels.
On the global front we expect the growth story to remain intact
We anticipate that growth in earnings could decelerate, and that this is more likely than a market earnings collapse. We also believe that US bonds could remain under pressure, and therefore prefer the wealth-creation properties of equities above those of fixed-income assets.
Thorough research and selective buying offer protection
Stocks already reaching lofty price-earnings multiples are likely to feel the pressure. Lessfavoured stocks offering better margins of safety are likely to prove more resilient. In times of volatility, we expect irrational selling, which we can exploit and use as an opportunity to buy selected counters at lower prices.
Staying focused on the long term remains the key to successful investing
Long-term data shows that short-term bouts of volatility do not influence the performance of wealth-creating products.
Short-term volatility is the playground of day traders and rarely raises the eyebrows of long-term investors. But it is one thing to say this, and more difficult for investors to stick to their intentions when volatility materialises.
In recent times, we have certainly had our share of volatility — Brexit, Trump, Nenegate and Steinhoff — to name a few. That is why we consider the ability to withstand volatility as integral to our investment process at PSG.
The importance of constructing robust portfolios
We monitor our products and underlying managers, while providing advice and managing portfolios to best protect our investors. Diversification between different managers and investment styles is a cornerstone of our investments, and the benefit is highlighted by our stringent selection process. Assets and shares are selected in a way that if some underperform, others outperform — ensuring less risk of volatility in the short term and underperformance long term.
Our investors rarely need to worry about short-term volatility because our products are built to withstand this and provide consistent, above-benchmark returns over time.
When we continue to deliver on the investment objectives in line with our funds’ benchmarks, despite bouts of volatility, we enable our advisers to better manage investor behaviour, and they are better positioned to help clients build long-term wealth.
Volatility is a given
We understand volatility is a feature of our investment environment. Managing volatility — using it as an opportunity where appropriate and continuing to focus on the long term — enables us to provide clients with solutions that can withstand short-term turmoil.
When a proven investment philosophy is coupled with robust financial planning and advice, investors are far better positioned to reach their investment goals and achieve successful investment outcomes.
This winning philosophy remains integral to the way we manage our clients’ money at PSG.