Investors should avoid complacency, as higher volatility brings new opportunities.
Historically, investors’ behavioral bias toward taking on the riskiest assets has driven high volatility (while suppressing long-term returns). The decade from January 2010 to January 2020 was one of the most favorable environments in 120 years of market history. It was a decade of unusually low volatility, exceptionally high return, and consistent upside in markets. The long-term history of markets has also shown us how investors get complacent, and we are seeing signs today of investors over-extrapolating the good times far into the future, leading to a substantial re-rating of market valuation. Downside risk remains very real, as uncertainty around inflation expectations continues to increase alongside a possibility of policy errors. Furthermore, volatility has settled on a new medium-term average in recent months. Typically, higher volatility allows for opportunities to add value as an active manager. And regardless of directional moves in the market, volatility will remain a key player in markets for the foreseeable future. Investors should come to terms with the fact that returns will be scarce going forward and, additionally, they should also heed the dangers of excessive equity risk. Equity risk has to be managed diligently and carefully, paying attention to the less-visible risks. Returns will be more scarce and the investor’s path likely more ridden with pitfalls, so an active approach where the various permutations are examined meticulously is appropriate.
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The views expressed are the views of Kishore Karunakaran and Chee Ooi through September 16, 2022, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal.
While the term “defensive equities” is generally used in connection with stocks that possess defensive characteristics, such as stable cash flows and lower volatility, it may also be used to refer to lower-risk securities such as government bonds and preferred shares. Defensive stocks may outperform growth stocks during periods of economic uncertainty when equity markets display a declining trend, but may underperform during periods of economic expansion.
Actively managed funds do not seek to replicate the performance of a specified index. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Quantitative investing assumes that future performance of a security relative to other securities may be predicted based on historical economic and financial factors, however, any errors in a model used might not be detected until the fund has sustained a loss or reduced performance related to such errors.
The sample 80:60 portfolio returns shown in Figure 1 are based on the returns of the underlying market indices in the proportions shown. The returns of the “80:60” strategy were achieved by multiplying positive monthly returns by 80% (0.8) and negative monthly returns by 60% (0.6). Months with performance of 0% remained as such.
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Exp. Date: 09/30/2023