After the losses suffered through the global financial crisis we went to our clients and asked what they valued in an investment program.
The response was that they wanted a strategy with:
• Less risk
• Lower fees
• Better returns
• More communication
Traditional thinking would suggest that it is impossible to achieve all of those things, especially seeing as some of these goals are outside of our control (level of risk, amount of returns).
Rather than throwing in the towel at the outset, we analysed a wide range of different strategies from around the world, picked those that would work in an Australian context, and created the volatility control strategy.
How the strategy works is quite complex, but our commitment to all of our clients is that if you don’t understand it and you’re not comfortable with it then we won’t recommend it. With that in mind we are confident that most people will understand how this works after an initial discussion of the concepts involved. Explaining all of this on a website isn’t practical – if you are interested you need to book a meeting with one of our strategists.
The highlights of the strategy are:
• Investing this way has produced more than 3 times the return of a simple Australian share market index investment over the last 10 years.
o Average return of the ASX200 for the last 10 years was 2%
o Average return of this strategy was 9%
o Historical performance doesn’t necessarily translate into an accurate prediction of the future but this strategy is specifically designed to out perform the ASX200.
• When market volatility is high this strategy holds more cash, when volatility is low it holds more growth assets.
o High volatility has historically been an indicator that markets are either about to fall or are currently falling. When values are going down your best haven is a defensive asset like cash.
o Market improvements tend to happen slowly and this corresponds with a period of low volatility. If the market is going up then as long as its going up faster than the cash interest rate then you want to be involved so that you enjoy the extra returns.
(Note that this chart uses a leading indicator of volatility that is different to the calculation our strategy performs. Our strategy uses actual volatility figures – the results are very similar and the theory is the same)
• Where possible the assets that make up this strategy are held directly by the investor.
o This keeps the overall fees to a minimum
o In most cases running this strategy costs less than your current approach
• This strategy is rebalanced in line with market movements
o We have two versions of the volatility control strategy, one is rebalanced weekly, the other is rebalanced monthly.
o Every time we perform a rebalance we send the investor a message detailing what was done and why. This keeps you up to date with your investments and reassures you that someone is actually working to get the most out of your money.