Investing in a time of fear
Investor Insights - Monthly news for investment professionals February 2016

It would be an understatement to say that it has been a rocky start to 2016. World markets are in turmoil. Fear abounds. Here in Australia, the stock market has followed the US stock market in experiencing its worst ever start to the year.

So what are investors to do? Thankfully, market panic is not new. We’ve all been here before. In this edition of Investor Insights we consider some of the tried and tested methods that investors can use to build portfolios that perform in times of market uncertainty.

2016: A beginning to forget

Let us first quickly summarise what has been happening since 2016 began. Most analysts would start the discussion by focussing on China. Since 1 January, the benchmark Shanghai Composite Index has dropped by almost 20% from 3,300 to 2,700 (first chart below). This continued the sell-off that began in mid-2015, when Chinese investors clearly decided that the extraordinary bull market in the first half of the year had wildly overshot fair value (second chart below).

From a simple reading of the charts, one could conclude that the real problem for the Chinese bourse was the excessive run-up in the first half of 2015, not the sell-down since, which has so far simply taken back the gains. But emergency closures of the Chinese bourse and continued negative sentiment have had their effect. International investor sentiment has also turned. Famed international commentator and fund manager, Nouriel Roubini, said in Davos in late January that markets had swung from fawning adulation of the Chinese policy to near revulsion on scant knowledge and a string of misunderstandings.

It used to be said that when the American economy sneezed, the Australian economy caught a cold. That same dynamic now holds true of China and the world. In response to the ructions in China, both the US (first graph below) and the Australian (second graph below) stock markets have retreated significantly since the start of January.

All of this has contributed to the general atmosphere of fear and uncertainty about market prospects for 2016. “In a crowded hall, exit doors are small”. So wrote RBS credit chief, Andrew Roberts, in January. “Sell everything except for high-quality bonds.” He tipped stocks in Western countries to fall by 20%, emerging markets to crumble and oil to trade at historical lows.

The risks for investors

All of this adds up to a very difficult time for investors. It’s true that stock markets tend to bounce back from bear market slumps. But, as the charts below show, there is no universal law that this must occur in the useful lifetime of an investor. The first chart shows the US Dow Jones Industrial Average (DJIA) in the years leading up to and following the Great Depression. From its peak in 1929, the DJIA crashed on an extraordinary scale and then took about two and half decades to regain its losses. The second chart shows the benchmark Japanese Nikkei 225, which peaked at nearly 39,000 in December 1989, before commencing a crash from which it has never recovered. Twenty five years later, the Nikkei 225 still languishes just above 15,000, despite an ‘Abenomics’ led surge over the last couple of years.

It is a sobering thought that an experience of this sort (if not quite the same magnitude) is familiar to contemporary Australian investors. As the chart below shows, the ASX 200 remains well below its pre-GFC highs, despite the fact that we are almost a decade down the track. For most investors at or near retirement, this is an unacceptably long period to hold portfolio losses – particularly if share sales are required to fund living expenses.

Building a better portfolio

So how can a rational investor respond to the risk of market volatility? Our view is that there are three key principles to bear in mind in constructing an investment portfolio, all of which help protect against volatile markets.

First, Keep It Simple, Silly (KISS). You are far more likely to be burned by market gyrations if you have not properly understood the investments you have chosen. You should consider weighting your portfolio to straightforward investments where the risks can be known and understood.

Second, never leave all your eggs in the one basket (diversify). All investments have risks and no investment is free from volatility. By building a diversified portfolio, you can ensure that fluctuations in individual investments and markets will not have a disproportionately adverse effect on your portfolio. In particular, make sure that you have an appropriate exposure to fixed income investments. Fixed income investments are generally built around regular income returns, repayment of initial investment on maturity and a higher level of capital stability than equity-based investments.

Finally, remember that getting rich slowly never goes out of fashion. Don’t be greedy. Remember that the largest market gains generally occur not long before the crash. In these bipolar times of great market volatility, it pays to take a steady, measured approach to investment and let time and compounding interest work in your favour.



Market update and investor briefing

Invest 30 minutes of your time to hear from our quarterly market update and investor teleconference.

Our presentation will cover the domestic and international trends and our ‘headwinds and tailwinds’ analysis. We will also update you on the Australian property market and our Credit Fund performance in the last quarter.

Event Details

Date: Thursday, 25 February 2016

Time:

NSW, VIC, TAS, ACT

12:00pm - 12:30pm  (AEDT)
  SA 11:30am - 12:00am  (ACDT)
  QLD 11:00am - 11:30am  (AEST)
  NT 10:30am - 11:00am  (ACST)
  WA 9:00am - 9:30am  (AWST)

Where:

Connect through your computer or by telephone

Further details will be provided on registration.

Best regards,

Chris Andrews
Vice President,
Chief Investment Officer

     
view newsletter in a browser
     



The above awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Credit Fund and may be viewed

La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Credit Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. The PDS is available on our website www.latrobefinancial.com or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.

- The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund and may be lower than expected. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.
- Past performance is no guarantee of future performance.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Credit Fund.
- Any rating is only one factor to be taken into account in deciding to invest.

1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
3. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Credit Funds under AFSL 222213. It employs over 150 staff and has managed over AUD$10 Billion covering over 100,000 investment grade assets since inception in 1952.

Copyright 2014 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.

La Trobe Financial Services Pty Limited - Australian Credit Licence Number: 392385
La Trobe Financial Asset Management Limited - Australian Credit Licence Number: 222213

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content.
Terms & Conditions | Disclaimers | Privacy Policy