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Investors want protection, but how?

Investors want protection from market volatility – but all the options to achieve it are being described as “pretty unpalatable”.

Tuesday, July 30th 2019, 6:00AM 6 Comments

Ben Trollip

In its latest investment survey, actuarial firm MJW noted June was a volatile quarter for investors, encouraged by trade tensions between the US and China and the resignation of British Prime Minister Theresa May.

The actuaries said investors had been pondering how to prepare for the "next crash" almost since the lowest point of the GFC.

“Unfortunately, there are few compelling options. Defensive equities are expensive (at least relative to history), cash is yielding very low rates of return, and true alternative sectors, such as hedge funds, are costly and/or pose liquidity challenges."

Actuary Ben Trollip said while cash had a role to play in dampening volatility in portfolios, it gave no positive upside.

Bonds could also have a place, though interest rates were low compared to history.

"It's frustrating you don't get paid a running yield for having that insurance."

Hedge funds also might not give the protection they had in the past, he said.

“One of the worrying developments has been the increasing correlation of hedge funds to equity markets in recent years.”

He said he still favoured alternative assets but there were challenges with hedge funds such as liquidity and "significant" fees.

That correlation with equity markets could mean less protection from hedge funds in future.

But he said it was also possible that the correlation had occurred because only those hedge funds that had managed to match the market had remained in business.

Others that had been too defensive could have been forced out.

“Clearly, the traditional defensive asset class of global sovereign bonds remains the best diversifier. It still offers negative correlation to equities. Currency exposure (from a New Zealand investor’s point of view) is the other standout. The unhedged index has generally offered low correlation to the fully hedged index. Defensive equity sectors, such as infrastructure and property, too, are running at around 50-60% correlation to the broader equity market.”

Trollip said investors were worried about their options but some had talked themselves into a "false sense of security" given how strong markets had been in recent years.

"There's a number of people in the workforce who've had their whole careers in a post-GFC world. That's a scary thought."

Tags: bonds equities Markets MJW

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Comments from our readers

On 30 July 2019 at 9:21 am John Milner said:
Interesting observations, I guess. But all sounds like someone trying hard to time the market which of course rarely, if ever, works.
Might put this one with the insurance paper written, together with Hedge Funds.
On 30 July 2019 at 10:44 am Pragmatic said:
G'day John - yep agree that short term market timing is challenging... although history has proven that there are massive themes to capture / avoid to assist with portfolio construction. There's a useful insight from Ray Dalio covering these paradigm shifts - worth a read https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio/
On 31 July 2019 at 2:12 pm Eyeinthesky said:
@John&Pragamatic....

History has nothing to measure against here at a global level. We have NEVER before had a global debt-fest as we are immersed in now. It simply cannot be shrugged off. The banks errant trading practices leading to the GFC and the global population paying for the bail out is a debt tsunami of unknown proportions and consequences. However this scam has been going on a very long time.
Quite simply, we are probably in an economic meltdown that is going to change the world as we know it.

It will be interesting in the next crash to see what happens. No doubt everyone will yet again look to the Almighty Central Banking System to 'save' us....again... via printing more money out of thin air. Again.

https://en.wikipedia.org/wiki/Debt_deflation

On 31 July 2019 at 9:01 pm JPHale said:
And it is this stuff that the general punter struggles with. Outside my usual lane here. As a retail client with a bit of knowledge, it's the matching of what I see when I look outside my window on a sunny day, with the activities of the market. There is little to no correlation outside maybe a full moon.

Those removed from the day to day most of you are involved with, look at the market and wonder if we are just being too clever for our own good. That old theory of you hold too tight you'll choke the life out of it.

Eyeinthesky raises a number of good points that many people understand and get, yet that is also a simplistic view of things. One thing is very true, the debt level we are trading with globally is making the whole lot look like a house of cards. Where's the substance?

Plenty of it in the actual companies and countries that are the investments, it's the rest between the workface of community and the average punter's bank account and the ever-present perception of value.

Because the $900k house in Glenfield isn't much different, frankly the same, to the same $300k house in Glenfield 6 years ago. We know the physical asset hasn't changed but the value of it has wildly inflated.

It does feel like there are too many pigs at the trough and far too many are there just to take advantage at the expense of the average joe investor which has driven the inflation, and consequently the debt.

Which leaves the retail client and their adviser in a position where there needs to be both a significant level of client education and understanding of volatility before stepping up to the plate.

Which is getting into the unreasonable, and frankly I don't blame advisers taking the simpler path of long term planning with well researched and structured funds and staying the hell away from the real volatility.

But hey, I'm a risk guy, not investments and have quite a different view of the world to most :D
On 3 August 2019 at 3:37 pm Murray Weatherston said:
Hi JP
STWYK.
I thought your stats for house prices in Glenfield were wonky; and they were.
I would have been very surprised if they had trebled in 6 years = agr about 20% p.a.
So I looked up the numbers - median house price Glenfield June 2019 $838K; June 2013 $537K.
You have to go way back to January 2005 (14 1/2 years) to get a median price of $300k. That's about 7% p.a. on average over that longer period... [The 8th wonder of the world.
On 8 August 2019 at 5:25 pm JPHale said:
:D and that's my point Murray, I was taking about a few selected properties in the area that have had regular turn over with local agents I know, not the market averages. Sorry should have been clearer there.

One in particular had doubled in sale price about every 24 months. From what I recall there wasn't anything special about it other than it was sound, tidy and in a desirable price point for both rentals and first home buyers.

Yes, outlier but also the sort of thing that market punters use as a guide for expectations. The same expectations these same agents have more recently, before Christmas, been saying sellers need to adjust expectations to the softening market.

As I was trying to outline, the education piece is the bit that everyone is struggling with as consumers

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