Managing Volatility: Winning the loser’s game

Sebastian Cheek

To say we live in uncertain times could be a contender for understatement of the century. The UK’s decision to leave the European Union and the election of Donald Trump as US president last year caught the world by oﬀ guard, particularly after most people had written oﬀ the chance of both events happening.The fact they occurred provided a stark lesson to investors: don’t count your chickens before they hatch, and to prepare for the unexpected (as much as that is possible). Other parts of Europe, the Netherlands and France, appear to have quelled the rising tide of populism much to the relief of markets. But the threat remains from the Five Star Movement in Italy where the outcome of next year’s election keeps the stability of the European Union and eurozone hanging in the balance.As a result, markets have had to adjust to the idea that political risk is not just a by-product of investing in emerging and frontier markets. It is alive and well in the developed world too.For the majority of institutional investors, the beneﬁt of a long-term investment horizon will be of some comfort in these uncertain times. But that’s not to say investors should take their eyes oﬀ short-term volatility.Inﬂation, in particular, appears to be on an upward trajectory which poses a risk to trustees tackling pension scheme deﬁcits. Elsewhere, in their rampant search for yield, investors are piling into alternative credit products while certain areas of the equity market are looking like overheating.The key, as always, is to diversify across asset classes, protect capital and, as discussed in this roundtable, not chase performance. In uncertain times it is arguably better to avoid picking the losers than chase the winners.

Roundtable