With a period of sustained volatility expected in the markets, many advisors are receiving calls from their clients asking about the next potential move. Advisors are fielding questions that they either don’t want to face or feel they shouldn’t have to. In reality, volatility is a reality of being invested in capital markets and it affects everybody; savvy investors see volatility as a time of opportunity not doom.
“The way that I equip myself to not only endure, but also exploit market volatility, is to have a very explicit investment process that I use to navigate the twists, turns and changes that take place in the market,” says Eric Benner, Vice President & Portfolio Manager at Dynamic Funds
Benner gives the example of the first half of 2016 when the market was sour on financials, interest rates were low, and going lower, and financial profitability was middling at best. However, valuations weren’t telling the full story. “The reality was that these businesses, particularly high quality banks in high quality jurisdictions, were trading at almost generational lows,” Benner says. “It highlights why it’s so important to identify the highest quality businesses, understand of those the ones that offer the best valuation upside and then try to tilt your portfolio to be invested in those names.”
As the election approached last year and volatility spiked, investors tried to change their positioning and those financials paid off very well. Those moves created new opportunities in sectors like healthcare and consumer staples, which became less interesting to the market after the election. “That allowed us to take capital from profitable trades like financials and recycle it into the new opportunities the market was creating for us,” Benner says. “One of my favourite sectors has been, and is, global healthcare. In Europe and the U.S, it’s a sector that is full of high quality businesses that began to trade at a rare discount to the market during the election last year. I like market volatility because it gives us an opportunity to execute our investment process and add value.”
In order to best navigate volatile markets, Benner gives advisors two firm suggestions: develop an explicit process for allocating assets and only invest in funds with a mandate and level of volatility you understand and are comfortable with. “My personal philosophy is ‘Quality at a Reasonable Price’, which means we try to identify high quality businesses with significant competitive advantages and then invest in them at a time when they offer attractive upside to our estimated intrinsic value,” Benner says. “I always run a portfolio as if it were my own money. That allows me to sleep much better at night and others to sleep better at night, too.”
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A portfolio manager's tips