Low market volatility, high valuations and a multi-year bull market have some analysts concerned about the potential for a massive market correction in equities as well as bond and credit markets.
Gillham, who spoke to FSA on a recent trip to Hong Kong, is also cautious. He said it is dangerous to chase returns at the moment, especially when valuations are stretched in developed markets.
“There is no margin of safety in valuations, and if companies disappoint in their earnings we will see a big fall in their share prices,” he said.
“When [equity] markets are up, you tend to find customers just looking at the best funds that have returned the most, without having any regard to the level of risk.”
After a long bull market, it is obvious that funds invested mainly in equities will be the best-performers and clients will gravitate toward them. However, when markets start to fall, the same funds underperform and clients start to switch their allocation to the lowest risk fund. “It’s human nature, it’s not just in Asia.”
He also cautions investors who are chasing income through high-yielding equities and bonds. “Sometimes, high yields suddenly became low yields,” he said. For example, banks in 2007 provided the highest yields, and then in 2008, didn’t yield anything.
Instead of having targeted returns, investors should focus on their level of risk, a strategy that will serve an investor well through severe corrections, he said.
Tiered risk
Gillham co-manages the firm’s Compass funds, which are global multi-asset funds that have a risk-based objective instead of a targeted return strategy. There are four Compass funds, with the Compass 2 having the least risk and Compass 5 being the riskiest.
The asset allocation is reflected by the level of risk. For example, Compass 2 would have the least amount of risk assets, such as equities.
Each fund has a target volatility with set bands, he said, noting that the bands allow the fund managers to adjust risk levels in the portfolio, depending on the current market environment.
The funds, which were launched in April last year, are only available to professional investors.
Cumulative volatility
| Compass Portfolio 2 |
2.41 |
| Compass Portfolio 3 |
3.82 |
| Compass Portfolio 4 |
5.27 |
| Compass Portfolio 5 |
6.64 |
| Bloomberg Barclays Global Aggregate |
5.42 |
| MSCI AC World Index |
14.92 |
Source: FE Analytics. Data since the funds inception in April 2016. Note: indices are not the funds’ benchmarks and are just used for comparison purposes.
The performance of the Compass funds since their inception in
April 2016 versus the MSCI AC World Index representing equities and the Bloomberg Barclays Global Aggregate Index representing bonds.
The indices are not the funds’ benchmarks and are just used for comparison purposes.
