MD’s Preparedness for Market Volatility

August 24, 2015

The latest bout of stock market declines has prompted unease and uncertainty among some investors in the markets. MD Financial Management continues to monitor financial markets closely and to ensure that our investments fall within the parameters of our risk-management philosophy and long-term strategic thinking. We rely on a diversified approach that takes into account market volatility and downside risk and our funds are well-positioned to withstand expected volatility in the medium term.

”MD employs a time-horizon driven approach,” said Chief Investment Officer William R. Horton, Jr.. “We build portfolios to anticipate market downturns. No one can predict or avoid these developments, but we can work with, and around, them.”

What is happening?

The recent market turmoil began in the emerging markets sector with China’s decision to devalue its currency. This prompted speculation that the world’s second-largest economy is in poorer shape than previously thought and that China’s decision was intended to prop up its ailing export sector. Adding to the price swings in developing-nation stocks is the slump in commodity prices, led by oil. The uncertainty surrounding a possible rise in U.S. interest rates—the Federal Reserve is due to meet next on September 16-17—is also impacting markets.

North American stock markets followed the downward trend as investors considered the impact of these developments, mainly in China and the currency markets.

Shares worldwide succumbed to a global selloff that has wiped more than $5 trillion from the value of equities around the world since China’s currency devaluation on August 11, according to Bloomberg News.

Source: Morningstar (as of August 24, 2015 in CAD)

What does this volatility mean for MD portfolios?

Most of MD’s funds have performed well in the month to date, relative to peers, despite the latest market downturn. MD relies on investment processes that help to protect in market downturns and that are most suitable for our funds. This belief is factored in our time-horizon approach to portfolio construction: portfolios are modeled to achieve their expected rates of return taking into account market volatility.

Keeping market volatility in perspective

The latest correction should be considered in context. Markets typically rise after dramatic falls. The latest drop has occurred amid relatively high valuations for many equities. A pullback from these levels still means investors have done very well over the past few years.

Research shows that the market is on average relatively flat following a 5 percent decline, and usually rises in subsequent weeks [Source: Bloomberg News].

Source: Morningstar (as of August 24, 2015 in CAD)

Mr. Horton added: “It is worth noting that nothing, other than sentiment, has changed over the last two weeks since the start of this latest round of volatility. Some investors in the market are selling at lower prices than before. But remember that there are always buyers and therefore selective opportunities.

“This is not exclusively a sell-off but also, by logical extension, a buy-in.”

MD is prepared for market volatility

MD’s portfolio approach takes into account market volatility. We tactically reposition our portfolios to take advantage of shorter-term opportunities. MD works together with multiple external advisors in the management of the funds taking action on a daily basis to manage risk and capitalize on any opportunities.

We recommend that clients keep sight of their financial goals within each time horizon and ultimately maintain a long-term strategy. We encourage you to speak with your MD Advisor if you have any questions. Your MD Advisor can work with you to ensure your portfolio is diversified and well positioned to withstand market volatility.

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