The return of volatility this year caught some investors off guard, says Andrew Zimcik, member of the fundamental equity team at Connor, Clark and Lunn Investment Management. But current ups and downs represent a return to normal after an unusually calm 2017, he adds, and may foreshadow the end of this business cycle.
Based on long-term averages, Zimcik said during a late April interview that he expects global markets to experience about one day every week where prices move up or down by 1%.
“Last year, incredibly, there were only three of those days,” says Zimcik, whose firm manages the Renaissance High Income Fund. “In the first quarter of 2018, there were 14 of those days. If you annualize that for the full year, that gives you 56 days total, which is almost smack dab in the middle of the long-term average.”
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This return to normal means repositioning portfolios for the end of the business cycle, he says.
When the S&P 500 dropped more than 4% on Feb. 5, it had been more than 400 days since the index’s last 3% decline, says Zimcik. So, the correction in February woke investors up after the tranquility of preceding months.
Zimcik attributes last year’s low volatility to central banks that offered few surprises (Canada was the exception with three interest rate hikes between July 2017 and January 2018). Central bankers communicated clearly and there was only “modest inflationary pressure” around the world, he says.
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Synchronized growth also kept volatility in check: for the first time in a decade, none of the world’s 45 largest economies experienced an economic contraction, he says.
But the tables have now turned, and Zimcik thinks volatility is here to stay or could even increase—which impacts his portfolio.
“We start from the perspective that our objective with the fund is to provide investors with an attractive dividend yield in excess of the stock market yield, while at the same time delivering a return with lower volatility than the stock market,” he says.
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This means tilting toward stocks that are stable.
“We think the increase in volatility recently is a reflection of the fact that we’re getting closer to the end of the business cycle,” he said, as of late April. “Because of this, we’ve been increasing the weight of stocks in the portfolio that have more defensive characteristics. This means companies with strong balance sheets, lots of trading liquidity, stable earnings profiles [and] higher market caps.”
Food retailer Metro and real estate company First Capital Realty were recent additions to the portfolio that have those characteristics, Zimcik says.
“We think companies like that, which give investors more stability, some modest earnings growth and consistent dividend payments are likely to give investors a nice return and a smoother ride than the market as we approach the end of the business cycle,” he says.
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