Investors closely monitoring the markets would not be at fault for stating that volatility seems to have increased over the past 15 months or so. With 2018 being a year to forget, both in terms of total returns and the volatility it brought with it, the first quarter of 2019 was benevolent to investors, with both the ECB and US Federal Reserve more-than-expected dovish stance, sending risks assets markets higher.

Volatility levels were muted in the first three months of the year but did experience bouts of elevated volatility. Inevitably, times of increased volatility provide investors with attractive investment opportunities, but they might not necessarily have the adequate expertise to take advantage of such situations. Furthermore, it could be challenging for investors to control their emotions.

When equities (or bonds) are enjoying a rally, the so-called ‘herd instinct’ kicks in as investors seek to jump on the bandwagon and enjoy the ride on the upside. The same can be said when markets correct; moves can be further exacerbated on the downside as panic moves prevail and corrections deepen. The wisest thing for investors would be to remain calm. Having an investment portfolio which is exposed to different asset classes would be an efficient and effective strategy to be able to withstand periods of adverse market movements.

Bond prices have been historically one of the less volatile asset classes around, but recent market dynamics have defied the odds and bonds too have had their fair share of volatility of late. Equity markets are volatile by nature. Investors need to be aware that periods of rising bond and equity prices could be halted by market corrections and consolidations. It is in such times where those investors having a moderate risk profile could benefit from (and should consider) having an exposure to a balanced strategy/portfolio which invests in both equities and bonds.

In fact, balanced funds seek to do what the traditional investor does not; they seek to increase allocations to equity when the markets are declining, and limit their exposure when equity markets seem to be out-stretched. Individual investors managing individual debt and equity holdings separately could be faced with a tedious task involving trading costs and requires a level of expertise, which responsibility is passed on to fund managers whose task is to adequately diversify the portfolio from downside risks if either equity or debt markets enter a bearish phase.

The aim of balanced funds is to provide a capital growth and income over the medium to long term by adopting what is known as a balanced asset allocation approach. The exposure of the underlying funds is generally split between bonds and equities, with the fund manager having the flexibility to skew this allocation to which asset class s/he thinks would benefit most given prevailing market conditions. In stark comparison, bond funds are predominantly invested in bonds and likewise equity funds predominantly invested in equities.

So the split and diversification which balanced funds can offer investors will serve to even out the volatile returns of a bond fund or an equity fund. Historically, the returns of equity and bonds have not been positively correlated and this means that the potentially higher (but more volatile) returns from an equity investment will be moderated in a balanced fund with the introduction of an exposure to bonds. On the other hand, bond investors might wish to build an equity exposure without taking on the direct exposure to the equity market, and investing in a balanced fund gives investors that adequate level of risk-return.

Investors need not worry to rebalance their portfolio of individual holdings as balanced fund managers will do just that for them, selling over-priced securities, averaging down on under-priced securities, shifting between asset classes accordingly. Furthermore, a balanced fund will allow investors to participate in the long term growth of equity markets while managing the volatility of equity markets.

Balanced funds enable investors to remain focused on achieving their long term investment goals without the need of worrying about which part of the investment cycle markets are currently in. Such funds are hence suitable for the medium to long term investors having a moderate tolerance towards risk and who ultimately want to benefit from the long term capital growth equity markets have to offer.

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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