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Why we're calm, despite market volatility

By Dynamic Planner

Published: 20/03/2020
This site is for UK investment professionals only. If you're not an investment professional, please find out more about us at vitality.co.uk.
 

The time for calm is when the urge to panic hits its peak

 
VitalityInvest have partnered with Dynamic Planner to set the risk-appropriate asset allocation that underpins our Risk Optimiser fund range. In this article, they share their views on the response of global markets to the novel Coronavirus (Covid-19) pandemic. 
 

When others are panicking…

 
When you see empty shelves in the supermarkets and people panic buying on TV, you can’t help feeling that you are going to miss out – even though all the experts tell you that you won’t.
 
In much the same way with investment portfolios, and despite the fact that we know that we have selected our clients’ investments based on an agreed level of risk, we still feel a little panicky and have an urge to sell. This makes our (and advisers’) role in rationalising and reassuring all the more important.
 

Checking and then re-checking our assumptions

 
It is not untypical at Dynamic Planner for us to field calls or challenges that our return assumptions are too conservative and that the risks that we expect had gone away. Of course, Dynamic Planner’s risk and return assumptions cater for market events like we have been experiencing in March and which remain entirely correct and valid.
 
As you may very well know, at Dynamic Planner we efficiently and effectively assess the risk of any combination of asset classes – and in the case of Dynamic Planner risk profiled solutions, any combination of investment instrument or holding.
 
Fund managers are all different and will be using their own mandates, capability, and expertise to try and deliver the best return for the risk taken, pretty much in real-time. They will be issuing their own communications about recent market events and what they intend to do, and that will be informative for you and for your clients invested in those funds.
 

How are markets being impacted? 

 
Equity markets, especially developed markets, are down approximately by c.30%. From a peak last month on 19 February, the drops (as at 16 March 2020) can be read below:
Index name  Peak to trough loss 5% annual loss (expected)
 S&P 500 -29.41% -24.02%
 FTSE 500 -30.92%  -24.31%
 Euro Stoxx 50 -36.41% -31.56%

So, while these losses are extreme, we expect losses of around this magnitude to arise in times of economic stress or in cases on market panic. 
ftse 100 graph
The move, also, in the FTSE 100 can be seen above – and these are big moves, especially over so short a period. For context, the last such moves were witnessed in H2 2018, but they happened over almost six months. 

In terms of our modelling at Dynamic Planner, we remain quite confident. We use long-term models for our volatility estimation – and we have been criticised for our high expectations of volatility. The three graphs below show that even with these vehement moves, the ‘realised’ rolling volatility on these benchmark indices over the last 10 years is still some distance from highs experienced in the past 10 years (data as at 16 March 2020).

Rolling annualised volatility

rolling annualised volatility graphSource: Dynamic Planner

Volatility is inevitable in a market cycle

As can be seen above, the FTSE 100, after a 20% loss realised by 10 March, has just reached the levels of expected volatility after facing placid conditions since 2016. After the significant losses experienced in such a short span, historical volatility on Equity Indices have just crossed our expectations and moved towards the highs. In short, conditions like these explain why our volatility numbers are higher, because they incorporate dramatic moves as part and parcel of an investment cycle.

From our perspective, advisers can be reassured that you can stand by the risk and the return you have led your clients to expect – and that unless there has been a change in the client’s circumstances, they should stay invested.

Remember – just because you could not see the risks, that didn’t mean that they weren’t there. And just because you haven’t had the returns today, that doesn’t mean you won’t get them tomorrow.


Important Information

This document was written by Dynamic Planner. VitalityInvest takes no responsibility for any inaccuracies or errors in the content of the document.

Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund or plan. 

The value of investments and the income from them can go down as well as up and your client may get back less than they invest.


VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority. 
20/03/2020 | This article’s view is based on the law, practices and conditions as at the day of publication. While we have made every effort to ensure they are accurate, we accept no responsibility for our interpretation or any future changes. | VI NL 0014