LONDON, July 30, 2015 /PRNewswire/ -- At a recent
conference in London to discuss
prospects for the increasingly unpredictable global financial
markets, portfolio managers from Legg
Mason's affiliates were asked, "What risks do you think are
not fully appreciated by investors now?"
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For three the focus was on market volatility – its relative
lack, despite an uptick lately. While it increases concern and
risk, each believes low volatility is creating opportunity for
active asset managers and investors.
According to Evan Bauman, a
Managing Director and Portfolio Manager with ClearBridge
Investments, the "thing that makes me cautious is the lack of
volatility in the market."
"The U.S. stock market is at all-time highs, or close to
all-time highs," Mr. Bauman said. "You've also seen the VIX Index
with volatility measures near or at new all-time lows. Generally
lower volatility leads to lesser volumes and a more thinly-traded
stock market."
The ClearBridge team is always on the lookout for "liquidity
events," where market volumes and volatility rise quickly. Mr.
Bauman considers it important to "take advantage of liquidity
events – if and when they present themselves – similar to what
happened in October of last year, where the market had a 10 percent
correction in a very short period of time, or what happened in the
energy complex over the last nine to 10 months."
"As long-term growth managers, really arbitragers of time, we
try to take advantage of these liquidity events," Mr. Bauman said.
"But in general volumes and volatility in the market have been much
lower. This can present risk, if and when you get liquidity shocks,
similar to the Flash Crash of 2010 or the sharp pullback we saw in
2011. The lack of volatility or volumes, in general, presents
short-term risk to the market."
That view was echoed by James
Norman, President of QS Investors, who focused on the impact
of quantitative easing policies being pursued by the European
Central Bank (ECB).
"Volatility has been very low because that massive amount of
quantitative easing is being pushed into the market," Mr. Norman
said. "What usually happens is that comes to an end and investors
are not sure what to do. Any small macroeconomic event or
geopolitical risk that's abundant, some clear but some not known,
can have a very violent impact on equity markets. Equities ... have
been made much more attractive in terms of potential for
return."
However, Mr. Norman warned, "You have to be careful to make sure
you address the risks. Defensive equities are a great way to try to
capture upside but also deal with macro risks."
"We feel it is really important to focus on more defensive
opportunities," he advised. "And in particular on ones that produce
income. In this yield-starved environment, which is exactly what
the quantitative easing really brings about, you have to
search for income. At the same time, though, you also want to
search for return – but in a very defensive nature."
"What is very hard to predict is where investors are going to
seek returns and the impact on those markets, and how long that
will last," Mr. Norman added. "That is a very large macro event,
because we see tightening of the rubber band in terms of valuations
in certain asset classes. It is hard to know which rubber bands
will be tightened, how tight they will become and – when they snap
– what the impact will be across various asset classes."
For Bill Hench, Portfolio Manager
of the Royce & Associates US Small Cap Equity Strategy,
investors should pay attention to the growth of the exchange traded
funds (ETF) industry.
"There's a tremendous amount of products out there, making
promises or attempts at giving certain types of returns to
investors," Mr. Hench observed. "I don't think enough attention is
paid to the risks involved, especially when it comes to liquidity
in things like fixed income, some of the more dicier credits and
small cap and micro-cap, where liquidity in the best of times is
not so great."
While permutations of ETFs carry risks, they also create
opportunities for savvy investors.
"For managers like ourselves who deal in illiquid markets, it's
something we can take advantage of," Mr. Hench said. "With the
growth of this industry, you've seen growth in liquidity during
stressful times and in times of exuberance. If you've lived through
the cycles and seen what markets can do when the liquidity dries
up, and what you could do when liquidity is very bountiful – you're
able to really take advantage. Over the long term it could add to
your performance."
About Evan Bauman
A Managing Director and Portfolio Manager with ClearBridge
Investments, Evan Bauman co-manages
the Aggressive Growth, Multi Cap Growth and All Cap Growth
strategies. He has 19 years of investment industry experience, all
with ClearBridge and its predecessors. Mr. Bauman started in 1996
as an intern, before graduating with a B.S. in mathematics from
Duke University.
About William A. Hench
A Portfolio Manager with Royce & Associates who run the US
Small Cap Equity Strategy, Bill
Hench has 22 years of investment industry experience. He
joined Royce in 2002 from JP Morgan after 10 years in the
institutional equity business in Boston and New
York. Mr. Hench began his career as a CPA with Coopers &
Lybrand in 1986. He holds a Bachelor's degree from Adelphi University.
About James Norman
President of QS Investors, James
Norman is responsible for assisting the CEO with all
business, strategic and investment decisions. He is also a member
of the firm's Investment Oversight Committee and responsible for
global equity (DBI) strategy development. Before joining QS
Investors Mr. Norman was head of Deutsche Asset Management
Quantitative Strategies Qualitative Alpha research. While at
Deutsche Asset Management, from 1995 to 2010, he also served as
Global Head of Product Management, Senior Portfolio Specialist for
Active US Equity and Asset Allocation, and as a senior management
consultant. Previously he spent five years as a senior casualty
underwriter for CIGNA International. Mr. Norman has an A.B. in
economics from Vassar College and a
M.B.A. from New York University.
About ClearBridge Investments
ClearBridge Investments is a well-established global investment
manager with $117.8 billion in assets
under management as of March 31,
2015. With a legacy dating back over 50 years, our
long-tenured portfolio managers and fundamental research team focus
on building equity portfolios for clients who seek income
solutions, high active share or low volatility. Owned by
Legg Mason, ClearBridge operates
with investment independence from headquarters in New York and offices in Baltimore, San
Francisco and Wilmington.
About QS Investors
A wholly-owned, independently-managed affiliate of Legg Mason, Inc., QS Investors, LLC was formed
in 1999 as the quantitative platform of a global asset manager. As
an investment firm providing asset management and advisory services
to a diverse array of institutional clients, QS Investors delivers
disciplined, systematic solutions that address clients' complex
challenges. The QS team has developed unique approaches to
integrating quantitative and behavioral investment insights and
dynamically weighting opportunities in response to changing
economic and market conditions. Risk identification, assessment and
management are intrinsic to their process. Based in New York, QS Investors offers a broad spectrum
of strategies to clients worldwide, including actively managed U.S.
and global equities, liquid alternatives and customized
solutions.
About Royce & Associates, LLC
For more than 40 years Royce & Associates, LLC, investment
adviser to The Royce Funds, has used a disciplined, value-oriented
approach to select micro-cap, small-cap and mid-cap companies. The
firm has a seasoned staff of investment professionals, most with
more than 15 years of experience. Chuck
Royce, the firm's founder and a pioneer of small-cap
investing, enjoys one of the longest tenures of any mutual fund
manager. Royce & Associates, LLC is a wholly owned affiliate of
Legg Mason Inc.
About Legg Mason
Legg Mason is a global asset
management firm with $699 billion in
assets under management as of June 30,
2015. The Company provides active asset management in many
major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is
listed on the New York Stock Exchange (symbol: LM).
All investments involve risk, including loss of principal.
Past performance is no guarantee of future results. Equity
securities are subject to price fluctuation and possible loss of
principal. International investments are subject to special risks
including currency fluctuations, social, economic and political
uncertainties, which could increase volatility. These risks are
magnified in emerging markets. Income and yields will fluctuate and
are not guaranteed.
The views expressed are subject to change based on market and
other conditions. These are not intended to be a forecast of future
events, a guarantee of future results or investment advice.
The VIX is a benchmark indicator that measures market
expectation of near-term volatility expressed by stock option
prices.
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MAY LOSE VALUE
©2015 Legg Mason Investor Services, LLC, member FINRA, SIPC.
Legg Mason Investor Services, LLC and the mentioned asset managers
are subsidiaries of Legg Mason,
Inc.
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