You tell yourself it will be different next time and that you will be ready – only to find that when the next bout of volatility hits, you feel a bit uncomfortable taking on more risk and decide to sit it out – then end up kicking yourself yet again when the market recovers.
However, Steven Andrew (pictured), manager of the M&G Episode Income fund, says that it is possible to avoid this sort of predicament.
Because his whole definition of risk is dependent on the amount he pays for an asset, he and his team research investments to decide on the price they will buy at long before volatility hits – then ensure that they follow through on their plans when the market takes a tumble.
He points to the period between July and October 2011, when the eurozone crisis hit markets, to illustrate his point.
“Global equities, as many of you will recall, suffered a very traumatic experience then,” he said.
“And looking back, it doesn’t feel traumatic at all because so much water has passed under the bridge. At the time, that felt lousy for all of us, for everyone investing in equities, because you don’t see the bottom, you don’t know when it is going to turn. We only know that with hindsight.”
“So when you’re amid a bout of volatility, as that turned out to be, it is important that you have some kind of investment philosophy that tells you where value sits, because that tells you how you should behave in that period.”
“If the market decides to offer you a 10 per cent or 20 per cent discount on prices, you need some kind of anchor that you can hang on to so you can say ‘is this a good deal, or is it going to be a permanent loss that the market is changing its verdict on in terms of valuation?’”
“So it’s important to have that fundamental underpinning to how we assess these asset classes.”
Andrew runs a multi-asset portfolio and says the technique is just as relevant to buying bonds as it is for equities.
“It is very important to have those conversations outside of the chaos and outside of the noise, prior to all of those things, so you have an idea in your mind,” he explained.
“Certainly as far as I’m concerned, when the yield on a three-year Treasury gets close to 375, maybe a little lower, 370, then I should be much more interested in buying one of those.”
“I need to ascertain that prior to the event because I know at the time that will be the last thing I feel like doing, because the market will have told me how much it likes those assets. And I won’t want to deviate from that from an emotional standpoint.”
The manager adds that just as he can feel reluctant to buy assets that are performing poorly, he can find it difficult to let go of ones that have made him money – and so again, deciding on a price he will sell an investment at before he becomes emotionally attached is important.
He says that becoming complacent is another problem.
“We need to be quite fleet of foot in terms of not being lulled into a false sense of security. Equities have done very well, as has the portfolio,” he continued.
“When we opened a German equity position [in August 2014], and then we added more, we felt great, we felt like geniuses, we thought the market was rewarding us.”
“And then you feel like a clown, because the market then tells you how wrong you were – didn’t you realise growth was awful and deflation was around the corner and that policy was never going to be changed?”
M&G Episode Income aims to provide a high and rising income stream with added capital growth, while taking on less volatility than equities.
According to FE Analytics, the fund has returned 39.25 per cent since launch in November 2010, compared with 38.21 per cent from the FTSE All Share and 23.14 per cent from its IMA Mixed Investment 20%-60% Shares sector.
Performance of fund since launch vs sector and index
Source: FE Analytics
Its volatility score over this period is 6.01 per cent, less than half the FTSE All Share’s figure of 13.85 per cent.
M&G Episode Income has a clean ongoing charges figure of 0.86 per cent and requires a minimum investment of £500. It is currently yielding 3.33 per cent.
