UK - Low volatility within the UK equity market could heighten the challenges of managing new pension fund strategies such as portable alpha, unconstrained and absolute return funds, warns Investec Asset Management.
Marc Abrahams, head of quantitative research, said: “Though market volatility has recently picked up, it remains at low levels in historic terms. That means that there is considerably less scope for stock pickers to add value, so the appointment of a skilled team becomes especially crucial.”
He warned managers could be lulled into a false sense of security and leverage up the size of their positions in an effort to generate additional performance.
“When market volatility rises, this ‘doubling up’ of position sizes can be painful,” he added.
Abrahams argues that the combination of a tougher stock picking environment and unexpected changes in risk will make risk control paramount.
“This should occur first through the inherent control provided by a robust and repeatable investment process, backed by skilled fund managers,” he said.
“Second, there needs to be a perceptive application of further risk measurement and monitoring to see through raw numbers and understand the broader implication of the market environment on the particular portfolio’s ability to meet client objectives.”
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