In the latest Perspectives, David Jane, fund manager of the Premier Miton Macro Thematic Fund range, explains how market volatility is a feature that disciplined investors can take advantage of to improve outcomes.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Markets have recently been through one of their periods of volatility. Perhaps we are out of the other side, perhaps there is more to come. Only time will tell, what we do know is periods of increased volatility in financial markets are a feature not a bug. It is a feature that disciplined investors can take advantage of to improve outcomes.
Volatility is your friend in accumulation, it facilitates the beneficial effects of pound cost averaging, but once you are drawing on your investments it becomes an enemy, leading to ‘pound cost ravaging’. The greater the volatility of the strategy the greater the impact. This suggests post-retirement clients who are using unit encashment should be using lower risk, and hence lower return, strategies. One way of avoiding this is to lean heavily on natural income strategies, reducing the need for unit encashment. Income from a portfolio is much less volatile than the capital value.
We discussed in a recent note about how income cost averaging, using market volatility to build income over time pre-retirement can really benefit clients and avoid the risk of moving to an income strategy at an inopportune moment. Similar concepts can be applied day to day in the running of an income fund.
Volatility is a fact of life when running an investment portfolio both at the aggregate level and at the individual security level. The chart below shows 90-day volatility of the MSCI world index, recent volatility has been greatly exceeded in the past.
MSCI World Index 90-day Volatility
Source: Bloomberg 31.08.1994 – 19.08.2024. Past performance is not a guide to future returns.
It is rare to go much more than a year without a significant market correction and individual stocks are more volatile still. These day-to-day moves mean that the yields available on investments also move up and down, of course in the opposite direction to the price movements.
One way to take advantage of this is as a market timing tool. Last autumn there were many very attractive yields available on individual equities and the overall portfolio holdings of the Premier Miton Cautious Monthly Income Fund had an exceptionally high yield. We took this as a signal to buy and have subsequently been proven right. A similar occurrence arose during the UK government bond debacle in 2022. At that time, we were able to buy many very attractively yielding corporate bonds. In both cases, the price signal from the attractive yields available at the time led us to make successful longer-term investments and build the income on the portfolio. The level of income paid may fluctuate and is not guaranteed.
Taking advantage of these periods of market volatility has greatly benefitted both the income growth and the capital growth of our portfolio. Over the 5 years to 31.07.2024 the Premier Miton Cautious Monthly Income Fund has returned 24.28% compared to a return of 13.97% from the IA Mixed Investment 20-60% shares sector*. Past performance is not a reliable indicator of future returns.
The same occurs at the induvial security level to an even greater degree, particularly with equities. Individual equities are even more volatile than the aggregate indices. Our continuous search for attractive income means we will be prepared for times when solid income paying stocks are undervalued. Our pragmatic approach means we are very comfortable to move on, should these stocks become less attractively valued. In this way we are continuously looking to build the income in the fund over time.
As a consequence, we can turn the enemy of post-retirement investing, volatility, into an advantage within the portfolio to the benefit of not just our natural income clients but also those who are encashing their units.
