Why active investing is good during volatile markets
A glance at the performance of the major stock indices in 2018 shows that volatility was a common theme. US equities followed an upward – although somewhat choppy – trajectory from early March, but they had a turbulent start to the year. Meanwhile, UK, European and Japanese equity markets experienced fluctuations of various magnitudes as they drifted sideways or downwards over the same timeframe.
Geopolitical events drove most of this volatility. On a global scale, trade tensions rattled the markets. US President Donald Trump made some progress with his immediate neighbours but reaching an agreement with China proved more challenging. Closer to home, the protracted and confrontational nature of Brexit negotiations led to a high degree of economic uncertainty. Later in the year, the Italian coalition government’s plans to increase fiscal spending in its first budget raised concerns that it would breach EU rules.
Navigating volatile markets is difficult, but it is under these conditions that active fund managers can add the greatest value. As the name suggests, they buy and sell investments in an effort to outperform a benchmark such as the FTSE 100 or S&P 500. This flexibility allows active managers to respond to what is happening in the markets, so they buy a share when they identify an opportunity, and sell one if they spot a threat.
Active vs passive
Compared to actively-managed funds, passive investments, such as exchange traded funds (ETFs) or index trackers, tend to underperform in volatile markets. They attempt to mirror the performance of a benchmark by buying and holding similar assets, and they only sell when a company drops off the index. As their asset allocation is static, passive investments cannot react to changing economic conditions, making them less effective in fluctuating markets.
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Regardless of whether you invest in active or passive investments, the value of your investments and any income from them can fall as well as rise. You may get back less than you invest.