And what if volatility came back to town?

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In the first half of 2015, investors faced a favourable environment, with crude oil prices far below the USD 110 a barrel level to many of us had become accustomed, a euro/US dollar exchange rate of USD 1.05 to USD 1.15 and – last but certainly not least – the announcement in January by the ECB of a full-blown programme of asset purchases (‘quantitative easing’). Reflecting the significance of this macroeconomic news (and the long-awaited signs of an economic recovery), valuations in many asset markets rose to historic highs – if they didn’t exceed them!

Time for volatility to return?

After years of relatively calm and clear trends, mainly determined by the decisions of G3 central banks, 2015 might see volatility come back to town. On 3 June, after an abrupt rise in bond yields, ECB President Mario Draghi advised investors to “get used to periods of increased volatility.

Financial markets fluctuate in response to many factors including the economic outlook, geopolitical tensions and the policy decisions of central banks. Thus, worse-than-expected economic data and a resurgence of geopolitical concerns can quickly generate tensions and boost volatility. For this reason, monitoring the level of volatility in financial markets is of paramount importance to us.

Isovol: An approach to mastering volatility

This is precisely what THEAM’s Isovol strategy enables us to do. By putting volatility back at the heart of portfolio management and defining the volatility of each asset in the portfolio as a fundamental criterion for asset allocating, this strategy is focused on mastering volatility and improving the participation in market trends. It bases investment management not solely on a manager’s judgments, but on a relatively simple signal: the volatility of the markets in which they invest.

Volatility-driven exposure can produce attractive results

In terms of behaviour, in an Isovol strategy, rising markets are naturally being bought and volatile markets are underweighted. The result is a reduction in maximum losses in times of market turbulence. This explains the attractive performance of the strategy in recent years, but also an improved participation in the various uptrends. In recent years, THEAM’s Isovol management strategy has been effective in improving risk-adjusted returns.*

Investing in a flexible way, in a multi-asset class universe of international assets, broadly diversified via futures and index trackers, helps give investors a clear view of their exposure.

Thus, the Isovol strategy can be particularly suitable for investors seeking a straightforward and intuitive strategy targeting a stable level of volatility, without sacrificing performance.

 Reduced drawdowns and improved participation in market trends

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Source: Lipper, Morningstar as of end February 2015; classical share class, net of fees in euros. * Past performance is no guarantee of future performance.

 

Rock band Thin Lizzy, whose lead singer Phil Lynott is featured in the visual accompanying this article, went through a rollercoaster evolution in the late ‘70s and early ‘80s, earning the moniker ‘one of the greatest rock bands of the 20th century’. ‘Thin Lizzy. The Boys are Back in Town’ documents the band’s volatile history and includes a reference to one of its best known songs, topping the charts in its native Ireland in 1976. More on http://www.thinlizzy.org/home.html

The Lipper classification Global Mixed Asset EUR Flex includes funds with a flexible asset allocation between fixed income securities and variable income securities. The objective of the manager is to provide maximum performance by adjusting the level of risk depending on the market environment. According to the market environment, it is possible that a multi-asset class flexible fund may be fully invested in one of the asset classes of the fund’s investment universe. The securities exposed to the reference currency are overweighted. Investments are limited to the country/region of reference and to the reference currency. The Morningstar category Europe OE EUR Flexible Allocation – Global regroups flexible and diversified funds invested in all geographic areas for investors whose reference currency is the euro. The benchmark is composed of the Barclays Euro Agg Bond TR and half theFTSE World TR.
Andrea Mossetto

Senior Investment Specialist at THEAM

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