Cover Story
4 / 5
Should investors bother trying to suppress risk or would they be
better off taking a gung-ho approach to maximise returns?
Anthony Luzio finds out
How I learned to stop
worrying and love
volatility
M
anaging volatility is a
lucrative business. The
IA Volatility Managed
sector has grown from
£19.3bn at launch in April 2017 to
£34.6bn today, which when added
to the £59.1bn in the IA Targeted
Absolute Return sector and the £120bn
in the IA’s three Mixed Investment
sectors, makes up about £215bn in
funds designed to offer some level of
protection from the natural peaks and
troughs of the stock market.
The rationale behind a lot of these
funds is they help investors reach
a certain “target”. Yet most of these
funds work by obtaining growth from
their equity exposure with the other
assets hedging against a correction
and offering little in the way of
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[VOLATILITY]
“If you halve your money,
you’ve got to double it to get
it back. And so that is the
big advantage in some kind
of absolute return strategy”
returns. This leads to the obvious
question – as long as you don’t need
the money in the next 10 years or so,
why not just put it all in a diversified
portfolio of equities or a tracker and
accept a higher level of volatility for
what should in theory produce a
higher level of return?
Charlie Morris, head of multi-asset at
AHFM, says the obvious reason why
you shouldn’t completely disregard
volatility is so you can compound at a
faster rate: “If you halve your money,
you’ve got to double it to get it back.
And so that is the big advantage in
some kind of absolute return strategy.”
Yet over the long term, a portfolio
of equities still tends to outperform
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