Volatility Management
Taking Risks for Rewards
By Saftar Sarwar, Chief Investment Officer, Binary Capital
August was an interesting month. Our investment strategy came under some market stress, volatility was very enhanced. It is very pleasing to note that our focused but diversified approach delivered. This was further validation of our strategy and thinking. We performed well. We continue to take a forward-looking approach to investing, an approach that many in the market are also coming around to.
August started off with a level of volatility and drawdowns, which then surprisingly gave way to a pull up in markets in the subsequent weeks until the end of the month. Markets have performed well as a result, with the US market at the end of August close to its all-time highs.
Generally, the rising and pause interest cycle is over. This is clear. Inflation is under control and importantly expected to remain in control. The next step is down (as already demonstrated by the UK’s BoE and the European, ECB) US Interest rates should land to about 4.5% in the coming months.
What does this change of interest rate cycle mean in terms of equity returns and markets generally. As interest rates move from their current elevated levels markets to some extend have priced in some of the short-term movements in rates. It is the more the extent and levels of interest cuts in the coming years that is the uncertainty factor and will create further market volatility.
The beneficiaries of lower interest rates will typically be the growth sectors, as investors move away from high yielding assets, cash and seek better returns for their capital. This should benefit our investment style and overall investment philosophy. Overall, across the range we have a bias (strong allocation) towards such areas in technology, healthcare, biotechnology and other growth focused sectors. These are long-term positions. We see this very much as exposure to future trends in key global areas which will have short-term and long-term impactful returns on share prices. The capability of these positions to be general positive outliers of returns is very evident.
Previously I have talked about technology as a significant growth area. Another area is healthcare, why?: rising longevity, government spending under pressure, especially healthcare spending. The rise of data science, analytics and more innovation in research and development. Artificial intelligence will also accelerate many areas in healthcare. This can only be a good thing for patients, disease management and eradication. We have seen recent practical innovation in weight loss management, diabetes control, cancer detection and cure, also treatment of Alzheimer’s disease to name just a few important developments. This range will only increase. As investors we focus on the opportunities in these areas and how best to take exposure to such an innovative sector group. Healthcare innovation is truly outstanding.
Initially in August there was a period of drawdown in performance due to volatility around the Japanese and currency markets. Subsequently volatility settled down. Returns picked up again especially in the US and NASDAQ Indices.
During the month our returns in our various investment portfolios were positive across all the risk categories. This is especially pleasing due to that extreme market outlier volatility trigger event. Being calm and patient was a good strategy in August.
According to the Morningstar universal DFM database we continue to be one of the best performing DFMs. This year, so far, many of our strategies sit comfortable in the top 1% of their respective peer group universe. A joint achievement of performance delivered with excellent risk management.
As we look forward to the remainder of the year, we are confident that whilst there will continue to be volatility and at times very high market stress, we are well positioned for long-term future return generation within a robust risk management framework.
The very specialised way we manage capital: our long-term, patient investing approach to asset and investment allocation together with many of our non-consensus thinking provides clear and an obvious differentiation in the market.
We provide guidance when others deliver noise.
