High volatility funds best performers in last five years

Investors in high volatility funds in the Australian Equities sector have been rewarded over the last five years, according to data from FE Analytics.

The quartile of funds for high volatility have consistently achieved stronger returns than the 25 per cent of funds in the sector with the lowest volatility, beating both these funds and the sector average across multiple timeframes.

High volatility members of the Australian Equities sector returned 12.10 per cent in the five years to 30 November, 2017 annualised. This compared to 10.05 per cent for low volatility funds and a sector average of 10.15 per cent. In cumulative terms, this translates to a 15.56 per cent difference in returns.

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They similarly beat both low volatility funds and the sector over three year annualised returns, by 2.05 and 1.95 per cent respectively. High volatility funds were also the strongest performers over the last year, outperforming their low volatility counterparts by 0.73 percent and the sector by 0.29 per cent.

While high volatility funds have enjoyed success in the bear-free market of the last five years however, returns over the last ten years suggest that investors need to consider low volatility products as well. As the graph above shows, when the Global Financial Crisis hit in 2008, high volatility funds in the Australian Equities space struggled more than low volatility alternatives or the sector overall.

In 2008, the 25 per cent of funds with the highest volatility suffered returns of –44.43 per cent, compared to –33.35 per cent for low volatility investments and –35.97 per cent for the sector overall. While high volatility funds did record a significant recovery in 2009, the data illustrated in the graph shows that they did not maintain their recovery as well as those with low volatility stocks.

Recent data from Schroders suggests that there is limited industry concern regarding an imminent market correction, though. The research house surveyed over 50 Australian brokers in September, following the 2017 annual reporting season, to gain insight into their asset allocation views.

They were largely unworried about a possible correction to equity markets soon, with twice as many respondents thinking increased returns were more likely than decreased returns over the next three years as did when Schroders completed the same survey in March.

Brokers’ lack of concern about a market correction in March proved well-founded, with equity markets delivering positive total returns in the six months to September, Schroders said.

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