Market Volatility and Media Noise

The fall in the value of shares in the USA and other markets has hit news headlines this week suggesting it to be a dramatic turn of events.  In fact, whilst the initial 6% fall in any day is large in isolation, the event is not extreme in the context of market fluctuations often seen along the path that generates long term returns.

As we noted in our quarterly commentary for the period ending 31 December, investors were favoured with unusually smooth and strongly positive returns during 2017.  In this context the recent fall is well within the ‘normal’ range and the pullback has for the most part merely reversed the added gains of January 2018 returning values towards the closing prices of 2017. 

Financial theory teaches us that risk and return are related, and that we get a premium for taking risk.  Once we diversify out concentrated risks, that do not offer extra reward, we are left primarily with market risk expressed as volatility.  That is, markets will have occasional set-backs on the upward path of value creation arising from corporate profits and economic growth.  In this context the sporadic downturns are just as important as the uplifts, because without them there is no risk, and without risk there is no premium, and then we only achieve the cash rate of return, which for most of us is not enough.

It is natural to feel some emotion from the set-back that even a temporary fall in market value may provoke.  However, I am reassured by the process we use to manage your money and the confidence I have in it, to deliver returns over time in keeping with your objectives. This process includes taking a measured amount of risk, with the knowledge that it comes with occasional blips in market value, that we ultimately need because it is linked to the premium we seek. 

Axiome Quarterly Report

In our Investment Market Review we discuss the strong equity market performance over the past quarter and the continuing strong global growth forecasts for 2018, aided, in part by the large cut to corporate tax rates in the United States. Over the quarter and for the past 12 months, all asset classes have performed well and posted positive returns.

Our client education piece for this month discusses the benefits of using independent expertise to provide oversight and monitoring of the performance of fund managers.

Axiome Quarterly Report

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Over the quarter we saw continuing good returns from equity markets that have performed strongly over the past 12-months. On the flip side fixed income continued to struggle, but also posted positive returns for the quarter.

Our client education piece for this month reviews the fundamental problem with any notion of Market Timing. Predicting when to exit and re-enter the market is fraught with difficulty and runs the very real risk of missing out on large upside gains as markets rally.

Buffett Says $100 Billion Wasted Trying to Beat the Market

Warren Buffett, the "investment guru", made a bet a decade ago that passive funds would outperform hedge funds.

Currently he estimates that about $100 Billion has been wasted in the US from active hedge funds. This is not only from the average under-performance of these hedge funds, but also from the high fees they charge investors, which offsets much of the profit for the investment portfolios, to the benefit of the hedge fund managers.

He will almost certainly win the bet when it ends in December, with proceeds going to charity.       

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Axiome Quarterly Report

In our Investment Market Review we discuss the continuing improvement in economic conditions globally. Over the quarter we saw a solidifying of equity markets that have performed strongly this past 12-months. This has been on the backdrop of several developments in current affairs: Emmanuel Macron becoming French President, the inclusion of Chinese domestic equities to the MSCI Emerging Markets Index, and a winding down of quantitative easing programmes.  

Bond markets have also recovered somewhat, but by contrast remain fairly flat in the current environment. Our client education piece for this month is entitled “Understanding Bonds”.  This article discusses the key levers of bond performance, which I hope will be a useful refresher for clients in understanding the influences behind the lack lustre bond returns of the past 9-months. 

Axiome Quarterly Report

Economic conditions improved further since the beginning of the year. This was reflected in equity markets which, despite the political noise emanating from the US and Europe, have performed strongly over the quarter. However this strong growth has also seen the return of inflation, both in New Zealand and globally. Existing bond prices fell as markets factor in the growing likelihood of increases in interest rates to counter inflationary pressures.

This quarter's article focuses on the importance of diversifying across different asset classes, not just within them. Recent volatility in particular markets following political events has reminded us of the importance of investing in a range of different types of assets and markets. 

Axiome Quarterly Report

As markets absorbed the reality of a Trump election win in the US, we have seen the beginnings of a ‘great rotation’ out of global bonds and into global equities. In this report we discuss some of the investment principles that underlie the resulting modest drop in bond values. World bond markets are more than double the size of world equity markets, with massive trading volumes that rapidly assimilate new information into prices. As such, it is possible for the tradeable price of bond holdings to drop in response to an unexpected rise in the outlook for interest rates – as occurred with the Trump victory. This may surprise some investors who think of all fixed income securities as though they are term deposits held to maturity and then repaid. Whilst bond values are far less volatile than shares, the same core investment principles of risk, return and diversification are equally relevant. 

Axiome Quarterly Report

This quarter's Investment Market review discusses market movements and general economic influences in New Zealand and around the globe. Over the last quarter markets were generally favourable, having absorbed Brexit and the uncertainty around the upcoming US election.

Also in this issue we discuss a new perspective on investing and are excited to introduce the new Global Sustainability Fund that has been added into the model portfolios for many of our clients.