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Positioning for market volatility


Leading up to the volatility we experienced in the final quarter of 2018, investors were treated to an unusually long period of smooth, positive equity markets. When markets are flying high, it's easy to forget that volatility is actually normal and a sign that markets are functioning correctly.

We expected market volatility to return—and we've positioned our funds more defensively as a result. Over the last 3 months of 2018, we saw sharp declines across major market indices including the S&P/TSX Composite Index (-10.11%), the S&P 500 Index (-13.52%) and the MSCI EAFE Index (-12.16%) in local currency terms.

The cause? Uncertainty

By the end of 2018, investors were reacting to a laundry list of potential risks. Top of mind are the slowing of economic growth and corporate earnings, in particular, weaker data out of China and the Eurozone. Geopolitical concerns like the U.S.-China trade dispute, Brexit uncertainties and French protests continued to weigh on investor confidence.

Risks have risen globally, but we believe the sell-off was overdone. As my colleague Ian Taylor explains, we remain positive about the outlook for equity markets.

Funds designed to outperform and smooth out the ride

Here at MD, designing funds and portfolios to outperform their benchmarks is a very deliberate part of our investment process. Part of this is crafting our funds and portfolios to offer a smoother ride—we aim for outperformance, but we won't sacrifice downside protection to do so. That might mean we give up a bit of return when markets are riding high, but the benefit is predictability that lets our clients sleep at night, particularly when markets are volatile.

Diversification is the key to long-term success. MD funds and portfolios are well-diversified. When it comes to managing volatility, it's important to diversify not just by asset classes, geographies and sectors, but also by investment strategy. Our mix of manager strategies is focused on minimizing volatility and smoothing performance during bumpy markets.

Another philosophy MD funds and portfolios are constructed around is to keep costs low. Lower fees not only leaves more money in the hands of our clients, it also allows us to avoid unnecessary investment risks to compensate. The low costs associated with MD funds and portfolios allows us to keep risks as low as possible and remain highly competitive.

As a result, MD's funds and portfolios have performed well against the competition overall. According to Funddata, all series-A MD funds and portfolios are in the top two quartiles over a 3-year period. Furthermore, 68% of those funds are in the top quartile relative to competing series-A investments. This is a clear sign that our process works and is good news for our clients.

Don't chase performance, achieve your investment goals instead

While short-term market performance grabs headlines, it won't change how we manage your funds and portfolios. At MD, our philosophy and process is geared towards protecting in the downturns. Interestingly, we have not had many downturns in recent years, but now that things have returned to normal, we are well positioned to continue to compound wealth over the full market cycle.

At the end of the day, short-term fluctuations in market and fund performance don't matter—what really counts is sticking to your long-term investment plan to achieve your goals.

For more information about current market events, your MD investments or our investment process, please do not hesitate to contact your MD Advisor.

About the Author

CRAIG MADDOCK, CFP, CFA, CIM, MBA, is Vice President, Senior Portfolio Manager and Head of the Multi-Asset Management team at MD Financial Management. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.

Profile Photo of Craig Maddock