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Create opportunity from market volatility
Against a backdrop of market volatility and deep investor disquiet, this year's research from Create and Principal Global Investors, ....

.... Market volatility: friend or foe?, seeks to distil the lessons learned from and strategies for navigating this challenging environment successfully.
Methodology involved participants first answering questions relating to four
key areas. Consequently, emerging investment themes were then identified and
explored via further in-depth questioning of 100 research participants.

Capital markets

The first key area involved capital markets, which most respondents agreed are in an era of
frequent volatility and price dislocation, with the overwhelming majority
anticipating prolonged periods of turbulence until the sovereign debt crisis in
the West is resolved. Many also thought that the unintended consequences of
financial regulation were exacerbating the problem. In short, the majority view
was that where capital markets are concerned, political, market and investor
horizons will remain out of sync for the foreseeable future.

Risk approach

The second area was investors' approach to risk should the current market volatility continue
as expected. The prevailing view was that after enduring rollercoaster
volatility since 2007, most investors are growing weary of letting risk
aversion rule their every move. Now, instead of guarding the purse strings,
many are seeking cannier ways to blend caution with opportunism, chasing
bargains and looking for an imminent silver lining as corporate fundamentals

Asset focus

The third key area is the type of assets bargain-hunting activities are focusing on.
Currently priced at their lowest level compared with bonds in 50 years,
equities were seen as a good medium-term allocation. Credit was also a major
focus, with opportunistic buying focusing on distressed debt and high-yield

Making volatility work

The final question centred on how asset managers can help their clients benefit from
volatility: in short, converting volatility to opportunity. Not surprisingly,
this was seen as a significant challenge for most asset managers, with many
identifying a lack of big-picture investment nous in the industry.  A
frequent response was that "asset managers need to reboot their business

Volatility is central

Themes emerging from responses to the four question areas also centred on volatility.

First were the barriers to effective modelling and forecasting that the current environment
creates. With current levels of volatility unlikely to change in the
foreseeable future, the fact that financial decisions are also being made in a
climate of extreme political instability is a further complication. In short,
investors know that volatility creates fear and, like fear, it feeds on itself,
potentially obscuring the fundamental issues on which investment managers should be focusing.

As one investment manager put it, "the biggest risk is political, and you can't model
that in a spreadsheet".

Another theme was that, despite the volatility, there might be a silver lining. This belief
arises from the fact that the current crisis is one of confidence, not
liquidity. Despite perceptions to the contrary, corporate balance sheets are
generally strong. Many US
companies have been aggressively deleveraging since the start of the European
sovereign debt crisis.

For active managers, such solid corporate fundamentals and continuing volatility present
great opportunities. Accordingly, many predict that the first signs of real
progress on the sovereign debt issue will see equities bouncing back with a

In summary, the report indicates that recent market volatility has shown that the three
conventional investment assumptions (risk generates return; hedged portfolios
give better returns than unhedged ones; and diversification is a free lunch) no
longer hold true.

The new wisdom is that nothing is an opportunity until we know its risks, their likelihood and
impact.  Most importantly, volatility and asset correlations might not
follow historic norms and investment managers need to act accordingly.


By:  Grant Forster is CEO of Principal Global Investors (Australia), sponsor of the report.
17th July 2012
Source:  I & T News


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