Managing volatility: Inside one wrap

When volatility spikes, even your best clients are bound to get a little nervous. But that’s why they engaged your services in the first place, not to mention those of the professional money managers you deal with.

Over the past decade, managed solutions, or wraps, have proven popular with financial advisors because they allow a hands-off approach, as rebalancing decisions are made internally.

One manager tells us that the turbulence is not over and explains how he’s been managing client assets.

“We maintain that there are structural headwinds for developed global economies, in particular the excessive levels of debt at both the household and government levels,” says Stephen Lingard, co-lead manager, Quotential Program, and director of research with Franklin Templeton Multi-Asset Strategies.

He says leading economic indicators are pointing to a global economic slowdown, though not necessarily a recession. Over the past quarter, he and his asset allocation team have been reducing risk levels, at both the asset allocation and underlying fund levels.

“Economic growth will need to be driven by emerging markets that do not have these long-term headwinds.”

That’s not to say the emerging markets face an easy ride; inflation remains a chief concern, especially in food, energy, wages and housing. But, he says, policy-makers have committed themselves to tackling these problems, even if some growth must be sacrificed.

“This is a positive for the longer-term health of emerging capital markets and economies,” Lingard says.

His Quotential team has reduced equity exposure to a “modestly underweight” footing, adding to cash and gold holdings. That has paid off in the past week of trading, dampening portfolios’ volatility, he says.

On the fixed income side, foreign debt exposure was reduced over the last quarter, particularly among high-yield and lower-quality sovereign issues.

“As bonds have continued to rally, we have taken some profits. We feel bonds have gotten ahead of the fundamentals, given that this is more likely a growth scare rather than the start of another recession, in our view,” he says.

On the fund selection process, he says market beta was reduced by shifting assets into dividend-focused and large cap funds while trimming economically sensitive fund holdings, such as energy.

Reflecting Sir John Templeton’s admonition that “The time of maximum pessimism is the best time to buy,” Lingard is ready to use his cash reserves if bargains appear.

“We will closely monitor the effects of the events of the past few weeks on consumer and business confidence. Assuming nothing changes in the short term, we will be looking for opportunities to add to risk assets like equities, where falling prices have made valuations compelling and corporate earnings continue to hold up extremely well,” he says.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.