Managing volatility: Riders on the storm Investors are on the verge of taking a step back in time.


After almost a decade of asset prices seeming to do little else but rise and the value of equity markets breaking record after record, volatility is expected to return and it could be here to stay.


The bouts of turbulence recorded last year are set to become a regular feature of the investment landscape, just like in the days before the financial crisis forced some central banks to start buying bonds.


The end of quantitative easing is just one catalyst behind why some commentators believe that the prolonged period of calmness is coming to end. Slower global growth, rising political risk and, according to some analysts, shrinking corporate profit margins in the US are other factors.


This could be just what some institutions need. Volatility is a long-term investor’s friend thanks to the attractive entry prices it could create, especially after valuations have been considered a little overheated for some time. Yet final salary schemes are on a de-risking journey and the growth assets held by those close to their endgame, which might mean handing the scheme over to an insurer, could be sensitive to any turbulence. And dips are not always followed by recoveries, as those invested in Japan’s stock market over the past 30 years will testify. Defined benefit (DB) schemes that are close to their end game should have sold many, if not all, of their equity holdings by now, but those who are years away will still own growth assets, especially if they have funding gaps to close. The question is, will they be ready to change their mindset and ride out the storms that lie ahead after becoming accustomed to markets typically going up for so long? Although the first quarter of the year was quiet, the professionals that we sat down with in March expect markets to get a little choppier in the next year or two. You can read their views on how investors should tackle the oncoming storms from page 4.


Mark Dunne Editor, portfolio institutional


Contents


P4: Managing volatility roundtable Various parties from the DB and DC worlds sit down to discuss how pension schemes should prepare their portfolios to face the expected return of volatility.


P22: What is a transition environment? Aon’s Tapan Datta on how investors can defend their portfolios against the predicted rise in market turbulence.


P24: Managing risk in turbulent times Two of Legal & General Investment Man- agement’s solutions strategy managers examine the tail risks on the horizon that could keep volatility in the headlines.


P26: Currency risk: Friend or foe? As investors’ portfolios stretch evermore global, currency has become a bigger issue. So is it time to consider active currency funds to use such risk to boost portfolio returns?


April 2019 portfolio institutional roundtable: Managing volatility 3


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