What the 2019 Rugby World Cup can teach investors about diversification – and volatility

Rugby is a tough game but one with big rewards for winning teams – especially in the case of the World Cup.

The 2019 Rugby World Cup kicked off on 20 September in Japan, marking the first time the competition has been held in Asia. New Zealand, the current cup holders, are hot favourites to take home the trophy again – after already winning three times before in 1987, 2011 and 2015.

But only time will tell whether they’ll celebrate a fourth win this year. With 20 teams in total competing for the prize, there are plenty of other teams that could come out on top, with England, Wales, Ireland and South Africa, all expected to do well.

Tackling volatility

New Zealand may well emerge victorious in this year’s Rugby World Cup, but this is far from guaranteed. After all no team will win every match and tournament. The same applies to investing, as fortune never favours one asset class year-in, year-out.

As the chart below illustrates, in 2018 the best performing asset class was European government bonds, the year before it was US equity – and in 2016 global high yield was the clear winner over the 12-month period.1

A successful rugby team will be made up of players who have different strengths and characteristics, but they should complement each other when combined into one – ideally being greater than the sum of their parts.

Investing is no different; staying suitably diversified across a variety of geographies and asset classes, such as equities, bonds, real estate and cash is vital. When investors take a multi-asset approach, i.e. they split their investments between different assets and regions, which don’t always move in the same direction, it means they are reducing their risk exposure and they are not overly relying on one asset class.

By opting to invest across multiple assets, it means investors are potentially reducing their exposure to market volatility.

Market challenges

After a difficult 2018, volatility has been comparatively absent this year. Our own proprietary turbulence index tracks the evolution of parameters based on volatility and correlation – as such if the measure jumps sharply, it implies that the market is entering a risk-off mood.

During late 2018, investors endured some significant volatility, with the index hitting 25, a level not reached since the days of the financial crisis. However, throughout 2019 our index has been comparatively benign.

At the start of the year, it was at circa 20, but by the end of May, it had fallen back to 8.6. However, by late September it was pushing 12, no doubt in the wake of rising geopolitical tensions, such as the drone attacks on two key production facilities in Saudi Arabia.2

But the relatively more benign backdrop has been reflected in financial returns too with global shares, as measured by the MSCI All World NR Index up 23% year-to-date. Over the same period, the JPMorgan Global Government Bond Index has delivered a total return of some 10%.3

But looking ahead, there are plenty of factors which could, and likely will, test markets. Slowing global growth, the ongoing US/China trade war and of course the geopolitical mix - especially Brexit – are all playing on investors’ minds.

Economic uncertainty has seen the US Federal Reserve cut interest rates once again in September – following a reduction in July, after not having eased monetary policy since the financial crisis. In addition, the European Central Bank has also reintroduced its own stimulus programme in a bid to prop up growth.

A winning strategy?

But while markets have been relatively steady, investors would be unwise to take the present environment of positive returns for granted – volatility can always return without warning.

And the best way to tackle volatility is to be prepared for it - this means maintaining a well-diversified portfolio.

While there will be one clear winner in the 2019 Rugby World Cup, other teams could still shine in their individual matches – and star performers can change over time and even disappoint.

It’s a similar story with investing - investors should never assume that just because a particular investment has enjoyed a winning streak for several years, that this will continue. In both rugby and investing, diversification may potentially be the winning tactic.

(Chart Source: Datastream, Bloomberg, AXA IM. Based on asset class benchmark on monthly basis. Eurostoxx NR Index, S&P 500 Composite TR Index, MSCI World TR Index, ICE BofA ML Global Corporate TR Index, ICE BofA ML Global HY TR Index, JPM EMBI Global TR Index, Thomson Reuters Global Convertibles Focus Hedged € TR Index, S&P GSCI Light Energy TR Index, MSCI Emerging EUR TR Index, FTSE EMU Government Bond Index all maturities TR Index). All data in local currency terms.

[1] Source: Datastream, Bloomberg, AXA IM

[2] Source: AXA IM, as at 19 September 2019

[3] Source: Factset, Data as at 20 September 2019 (€)

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