OCBC OneWealth App– Surfing waves of market volatility with multi-asset strategies

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Surfing waves of market volatility with multi-asset strategies

12 November 2018

Hello turbulence, my old friend

October was a deeply unsettling month for global equities as US stocks sank, effectively wiping out their gains for the year. This was the second time this year that global equity markets flashed red. The trade papers went into overdrive, listing every possible reason that could have triggered the broad risk-off mood in the markets.

From anxiety about peaking US growth and corporate earnings, to concerns about the impact of the US-China trade war on companies’ bottom-line to worries about tighter monetary policy and higher bond yields, investors were spooked and sold off rapidly. The VIX index – also known as Wall Street’s fear gauge – surged above its long-run average of 19 points, signalling great turbulence in the market. Indeed, as the chart below shows, volatility has returned with vengeance after a year of calm.

Gone are the old comforts. Monetary policy is only getting tighter.

Working quietly in the background amid the chaos on Wall Street, is the Federal Reserve. The Fed has accelerated the pace of shrinkage of its balance sheet and has hiked interest rates eight times since 2015, whilst signalling further increases ahead.

Across the Atlantic, the European Central Bank has wound down its asset purchase programme and is determined to end it altogether in December. Other major central banks, including the Bank of England and Bank of Canada, have pulled the trigger on interest rate increases this year as well.

As it stands, we are steadily moving away from the comforts of an accommodative monetary policy, characterised by low interest rates and ample liquidity, towards an environment where economic and corporate fundamentals will have greater sway. With markets broadly on an upswing in 2017, it gave a false sense of confidence that passive strategies – i.e. just buying into passive ETFs – were the best way to be invested. After all, ETFs are cheap and have performed well for the most part in the post-crisis era.

From passive to active in the age of turbulence

But, as we head into the later stages of the market cycle, characterised by rising bond yields, tighter monetary policy, slowing growth and higher market volatility, tracking a market index may not be the best option going forward. Active management becomes crucial to generate returns and mitigate losses in turbulent markets. Experienced fund managers, with access to deep resources, are better-positioned to steer portfolios through volatile periods, whilst still being nimble enough to capture market opportunities as and when they arise.

In particular, multi-asset strategies that are invested across multiple regions and asset classes are useful in navigating such rocky market terrains. “Don’t put all your eggs in one basket” goes a familiar investment adage. Diversification is the name of the game and is a good strategy for investors looking to reduce risk and increase stability of their portfolios for the long term. Spreading out risk across different asset classes that are ideally uncorrelated with one another can help mitigate the adverse impact of rocky market conditions on one’s investment portfolio, whilst still ensuring participation in any subsequent market upswings.

The benefits of diversification during volatile periods that are marked by steep declines in broader markets are quite clearly supported by the data. Tracing back and comparing the performance of various multi asset strategies against the MSCI World Index in October, we find that on a total return basis in US Dollar-terms, the MSCI World Index fell about 7.5%, versus various multi asset strategies which only saw declines of about 2-5%. In this regard, diversification helps to mitigate the downside risks in turbulent conditions.

Fixed income portfolios are vulnerable in the era of tighter monetary policy

In addition, in an environment where monetary policy support is receding with interest rates heading higher and central bank balance sheet shrinking, fixed income portfolios are clearly vulnerable. Higher interest rates tend to adversely impact bond prices, hence punishing the value of bond portfolios.

To mitigate such risks, investors with already heavy exposure in conventional fixed rate bonds, may consider increasing allocation into floating rate securities, in the context of a fully diversified portfolio. The coupons of floating rate bonds adjust upwards as interest rates rise, thereby allowing the price of the bond to remain relatively stable. Interested investors should engage this asset class in a diversified manner to mitigate single issuer risk. Investors may consider a unit trust that has a robust credit selection framework and a strict risk management process in place.

Our top pick is:

Fund name: Allianz Global Floating Rate Note Plus Fund

Fund strategy

The Fund offers investors access to the global floating rate note universe, both in the investment grade space and high yield segments, hence providing an attractive way to capture credit spread premia, without incurring material duration or currency risks.
The Fund targets an overall average investment grade credit rating, with less than 3% volatility. This might work well for the Fund as we expect volatility to remain elevated.

Investing in an actively managed and diversified portfolio of floating rate bonds can help mitigate the downside in an increasingly volatile fixed income market. Comparing the Fund’s performance on a total return basis against a fixed rate bond index in October, we find that a diversified floating rate portfolio strategy holds up pretty well, and with less volatility.

Volatile markets still pregnant with opportunities

The inconvenient truth is volatility, unsettling as it may be, has returned and is here to stay as markets head into the later stages of the economic cycle.

Yet, there is no shortage of market opportunities for those with the risk appetite to seek it. Periodic sell-offs in broad markets amid the ebb and flow of risk sentiments only make such opportunities cheaper to access.

As such, we continue to advocate market participation but in a prudent manner. Investors should always manage their downside risks and ensure their investment portfolios are adequately diversified to ride out potential turbulence ahead. Multi-asset strategies are useful for this purpose.

The information below solely constitutes the views of OCBC Bank and does not consider the specific investment objectives, financial situation or needs of anyone. The Bank is therefore not responsible for any loss or damage arising from this information. Investment involves risks. If you wish to make an investment, you should first speak to your OCBC Relationship Manager or a Personal Financial Consultant.

Discover transactional features by clicking the links below.

ALLIANZ GLOBAL FLOATING RATE NOTE PLUS AT SGD-H2

Suitable for Balanced/ Growth/ Aggressive

1-year performance

+ 4.07 ^%

ALLIANZ GLB FLOATING RATE NOTE PLUS AMG DIS SGD-H2

Suitable for Balanced/ Growth/ Aggressive

1-year performance

+ 4.29 ^%

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