Share traders might be enjoying the recent heightened stock market volatility, but for long-term investors, the novelty of gyrating markets has well and truly worn off.
Over the past 15 years, the S&P/ASX All Ordinaries Index has moved on average by 0.7% each day – whether up or down. The past month has seen the market become markedly more volatile, with an average daily move of 1.3%.
The heightened volatility is bemusing even seasoned market watchers – both ways. Switzer Super Report asked some of Australia’s top fund managers how they handle extreme volatility. Here are their top five tips.
1. Buy more on the downturns
The stock market must be the only market in the world in which things that people want to buy suddenly go “on sale” – and this scares the buyers. Geoff Wilson, the chairman and chief portfolio manager of Wilson Asset Management, says this can create opportunities to add to a shareholding in the downturns. Over time, he says, Wilson has learned that “when you are the least certain about what’s happening in the market, that’s probably the best time to buy. Wilson believes that the market occasionally swings to the extremes of both greed and fear: always have some cash handy for when “the blood runs in the street” and you can buy more of your favourite stocks, he says.
2. If you’re worried, it’s time to sell – but not now
Campbell Neal, executive director of K2 Asset Management, says that if a stock you own is regularly falling by 3% to 5% – or even more, as many are at present – it should be a buying opportunity. “You should be happy if you’re a net investor to see this, because you’re looking to put money to work. But if you’re really concerned when this happens, if you really have butterflies jumping around, it’s really telling me that either you don’t know your companies well enough, or you don’t trust your adviser enough, as to why you own the stocks you own,” he says.
There are two remedies for this: sell the stock, or do more work on it. “If this period of volatility really scares you, I think it’s a signal that you’ve either got to sell the stock, buy some more, or do the work you need to do to get comfortable with why you were holding it in the first place. But you shouldn’t necessarily sell into this volatility, because the stock could just as easily be up tomorrow,” says Neal.
3. Isolate the business from the market
Always remember that “there is a real business behind that stock code,” says Julian Beaumont, investment director at Bennelong Australian Equity Partners. “When the market is volatile, or falling, always make sure that you can distinguish between a general “market noise” effect, or a situation where there might be an actual stock-specific situation that is deteriorating – because those situations are very different to general market downturns,” he says.
At the moment, grocery wholesaler Metcash is a good example, says Beaumont: it is battling intense competition from Woolworths, Coles and Aldi – Metcash supplies the IGA grocery chain – and has Aldi’s fellow German Lidl coming into the market as well. Metcash plunged into loss in FY15, on massive write-downs, and while it is expected to return to profitability in FY16, it is not expected to pay a dividend until FY17.
“Where something you own is falling apart – like Metcash – then you’ve got to go back to the reasons why you own it. If, for example in the case of Metcash, it’s because you like the yield, you might do well to test how that yield is going to be maintained. And if the business scenario deteriorates further, what is the point of yield if you’re copping a capital loss?” asks Beaumont.
4. Turn the market off
This is an option, insists Andrew King, chief investment officer at Concise Asset Management. “There is just so much noise in the market, and retail investors can get overwhelmed by it. Most of the time, nothing is changing for their stocks.”
If a company has solid cashflow, a strong balance sheet, a large and leading position in its industry, a sustainable business model and a consistent dividend stream, it is ultimately not affected by short-term market moves, he says. “For those sorts of companies, not a lot changes for the actual business, apart from market noise. What happens with the Federal Reserve and interest rates and China and all of that will create volatility for CBA shares, but CBA will pay at least the same level of dividend as it paid last year,” says King.
“Either you’re going to hold the stock, in which case you don’t need to look at the share price, you can just turn all the noise off. Don’t watch the 24-hour stock market channels. Or with a lower share price, you’re going to get a higher yield if you’re investing today, and you can top up your holding,” he adds.
5. Do nothing
It sounds like the worst of all worlds – paralysed by indecision – but probably the biggest difference between institutional and retail investors, says Chad Padowitz, chief investment officer at global manager Wingate Asset Management, is that the latter do not realise that “doing nothing” is sometimes an active decision.
“One of the things that behavioural finance tells us is that generally, the more volatile things are, the more people feel that they have to do something to address that,” says Padowitz. “But most institutional investors realise that you don’t necessarily have to do anything just because the market is experiencing heightened volatility.”
“There’s no liquidity constraints on institutional investors so they can take a longer-term view. They’ll take a relative view – they’ll say, for example, BHP is disproportionately better value than Rio Tinto, so I’m going to buy it; and if BHP drops, as long as it doesn’t change that equation, they’re not going to sell it. But at the individual investor level, they generally take absolute views, and it’s binary, they’ll decide to sell BHP, take that money and pay it off their mortgage. At their best, institutional investors are quite good at realising that sometimes doing nothing, or even increasing exposure in a volatile environment, is a better scenario,” says Padowitz.
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