Growing Your Wealth Your Way

We are able to provide a wide variety of investment choices including mutual funds, ETFs, stocks, and bonds.

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Carpe Diem! Volatility-not so bad after all

Time_800pxRecent weeks in the financial markets have been dramatic. On August 10th the People’s Bank of China devalued the Chinese renminbi (yuan) and this unleashed an irrational flood of panic selling. While you may not share this sentiment, I have to confess I was glad to see some volatility returning to the financial markets. Typically that’s the time when your portfolio managers shine! It’s also a time when we at Fraser & Partners apply additional specific criteria in monitoring the investments you own. What we see will either confirm or prompt us to re-evaluate the investments we are recommending.

Every year we have events that trigger stronger than normal waves of buying or selling within the markets. This is a normal part of investing.

This is also when the stampede starts. It’s often referred to as “the herd mentality” – stronger than ever in this digital world of instant communications. Those who study finance understand that economic factors account for only 17% of stock market increases or declines. What about the other 83%? It’s the “herd” – the human factor.

Your portfolio managers are trained to seize opportunities during a stampede, whether it’s fueled by greed and optimism or fear and pessimism. We’re seeing lots of pessimism right now in terms of the energy sector and also emerging markets.

Have we hit the point of maximum pessimism? Take a look at the graphic below and watch for the signs of capitulation and despondency. Although it may seem counter intuitive, it is at this point in the cycle of market emotions that a value-oriented portfolio manager will be able to acquire high-quality investments with the greatest margin of safety.

Market Emotions Diagram

On August 24th I received an email from a portfolio manager. Included was a list of the top 10 holdings in one of their equity funds along with the price swings that had occurred in the share value of each of the 10 companies in one day. JPMorgan Chase & Co. was on the list. During the day this stock had opened at $50.07 per share and closed at $62.92, a change of 26%. If the manager was able to buy close to the low and sell close to the high, then it was a good day. By taking advantage of such price swings throughout the trading day, that manager was able to capitalize on the volatility for the benefit of investors. If the manager had a larger than normal cash position that day, even better!

When we evaluate investments during a period of volatility, we study the level of cash in the investment funds. For example, when we look at three of the equity funds that our clients own, we see that Equity Fund #1 had a cash level of 12% at the end of July; Equity Fund #2 had almost 40% and Equity Fund #3 had less than 5%. The third investment was already on our watch list because of inconsistent performance in recent periods. Based on our experience we do not expect that this fund will be able to provide as strong a return relative to the other two. We’re not naming specific investments in this blog, but if you own Equity Fund #3, over the next few weeks we will be contacting you to recommend a switch to a stronger holding.

Even if there is more decline ahead, it’s time to put your cash into the hands of the portfolio managers. They have a disciplined process. They know how to assess the value of the companies in which they are investing. They will be using this period of heightened volatility to strengthen the portfolio for strong long-term performance.

If you haven’t already done so, in keeping with your investment strategy, make your 2015 contribution now to your TFSA, RRSP, RESP. Let the portfolio managers take it from here. Call or send an email to your advisor to make arrangements.


The information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Jan Fraser, Life Aligned Investing of Aligned Capital Partners Inc. (ACPI) from sources believed to be accurate. The opinions expressed are those of the author and do not necessarily represent those of ACPI.

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