Intech: expect continued volatility

22/02/2018

Download

Based on Intech’s equity market stress monitor, five major market indexes are sitting on the extreme ends of major risk indicators. When key market indicators diverge significantly from their historical norms, it indicates market stress and the potential for increased volatility. This article discusses how Intech offer a unique perspective on risk. It explores how 2018 could be marked by asymmetric risk: Incremental gains in asset prices are probable, but they are likely to be smaller in magnitude than the low probability, but significant, negative tail event should volatility be elevated.
 
Old habits die hard; true in life but also in markets, which eventually revert to the mean.
 

As of the end of the fourth quarter and after recent, long absent, market volatility, five of the major market indexes – including the Standard & Poor’s 500 and MSCI World – deviated from their typical levels on three out of five key equity-market risk metrics: correlation of returns, dispersion of returns, and index efficiency. The MSCI Europe Index has all five of its equity-risk metrics at extreme values – indicating that it is one of the most ‘stressed’ indexes.

Data at the end of 2017, as well as data at present following recent volatility, suggests that 2018 could be marked by asymmetric risk: Incremental gains in asset prices are probable, but they are likely to be smaller in magnitude. We are likely to see continued volatility.

While there are times when markets will deviate from their usual patterns, they eventually revert to their old ways. Depending on the severity of the diversion, the move back can be abrupt and dramatic – and accompanied by substantial volatility.

Intech has been observing and applying the relationship between risk and market stability for decades. Rather than rely solely on backward-facing measures, such as standard deviation, investors can monitor market stability, or lack thereof, by noting where an index’s risk sits relative to its historical norms.

For all five metrics, the normal range is 40% to 60%. Anything higher or lower signals potential market instability, with extremes in the tails (ie, less than 20% or more than 80%) indicating greater risk.

Take capital concentration, which measures how capital is distributed among stocks in an index. For the S&P 500, the largest 50 stocks typically account for half of the index capitalisation. When large-cap concentration exceeds that, it suggests a bubble is potentially looming. But too little concentration isn’t good either; it’s indicative of excessive groupthink among smaller stocks. (As of the end of December 2017, three of the five major indexes were still near the typical range, but the MSCI EAFE and MSCI Europe tilted toward smaller-cap stocks.)


Source: Intech, as at 31 December 2017.

Recently, all five indexes exhibited an extremely low correlation of returns, which is to say that the idiosyncratic traits of stocks are driving returns more so than they have historically. This has been good for active managers, who have a better shot beating the market when correlations are low. Yet, it is also a reason for investors to be wary, as the trend could reverse if volatility increases.

Source: Intech, as at 31 December 2017.

Today’s markets are also marked by unusually low dispersion of returns for all five indexes; in other words, stock returns relative to the benchmark are converging. So while active managers may have an easier time spotting winners and losers (because of low correlations) they need to take incrementally more risk to achieve excess returns (because of low dispersion).


Source: Intech, as at 31 December 2017.
 
To gauge market risk at the portfolio level, Intech tracks index efficiency. This proprietary indicator looks at how much beta (market exposure) is required to construct an efficient portfolio (outperforming the index with less risk) by owning a selection of index constituents. A year ago, the S&P 500 hovered near its historical norm for this indicator, but it and other major indexes have since swung toward extreme beta levels. That means managers need to take on more beta risk in order to achieve above-market returns.

Source: Intech, as at 31 December 2017.


Historically, investors react to unexpected negative news with more urgency than they do positive surprises. Changes in this pattern, as measured by the skewness of returns, indicate whether the market is abnormally bearish or bullish. From the perspective of risk management, both extremes can be problematic. Not surprisingly, the five major indexes are currently tilted toward bullishness, with the MSCI Europe approaching exuberance, and the S&P 500 in the right tail of extreme bullishness.
  
Source: Intech, as at 31 December 2017.

Seeing Risk from All Angles

No single metric tells the whole story. When combined, however, they create a mosaic of market risk. When more indicators veer from the norm – and this pattern unfolds across global indexes – it’s reason for investors to take note.

Looking across major indexes, the picture as at the end of last year was suppressed global equity risk, but many risk indicators monitored by Intech diverged significantly from their average historical levels, and that intensifies the likelihood of greater volatility down the road.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Intech European Core Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund uses mathematical formulae to select investments. There is a risk that the processes used to invest in shares with higher volatility and low price-correlation may not achieve positive returns or outperform.

Risk rating

Janus Henderson Intech U.S. Core Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund uses mathematical formulae to select investments. There is a risk that the processes used to invest in shares with higher volatility and low price-correlation may not achieve positive returns or outperform.

Risk rating

Share

Important message