Investors should ‘do nothing, but consciously do nothing’ during times of heightened volatility, according to Vanguard senior investment planner James Norton, who urges them to instead rebalance their portfolios.
The early stages of the Covid-19 pandemic saw a broad sell-off across asset classes as investors sought out safety in the uncertain economic environment.
“Look at your portfolio and check your allocation,” Norton (pictured) explained. “If you were in a portfolio that was 70/30 equity and bonds yet due to the market fall you are 50/50 bonds and equities, you should rebalance, because if you don’t, you won’t benefit from any stock market bounce.”
“You need to sell your assets that have done well – i.e. the fixed income that has given you that protection – and you need to buy more equities.
“You‘re unlikely to get the market bottom, but it’s going to put your portfolio in a much better shape,” he said.
Observing some of the behaviour of Vanguard’s clients when the market fell in March, Norton said – unlike the wider retail investment industry – there had been “very little selling of equities.” Instead, he saw an increase in equity purchases.
“Trading volume for Vanguard clients is low,” he added, “the number making trades to their portfolio is 1-2 per cent, but what we’ve seen during market volatility, this has increased to 5 per cent.
“It’s a big increase in percentage terms, but still a very low number. It suggests clients are staying the course, being disciplined.”
Usually when markets sell-off, investor sentiments can turn very quickly, which can cause money to flow out of active funds.
However, Norton said he saw “a massive increase in account openings” initially, and that it has continued.
“Normally post tax year-end, you see it continue for a week or two, but it hasn’t stopped,” he said.
While one of the biggest names in passive investing, Norton conceded there is still a place for active management in an investor’s portfolio.
However, he stressed that investors need the discipline to hold their active manager through good times and bad, and that it is crucial investors can appraise and understand why an active manager is performing well.
Vanguard works with 20-25 specialist sub-advisers that include Wellington Management and Baillie Gifford as well as Oaktree Capital Management and Pzena Investment Management to co-manage its some of its active funds.
“Even the best managers go through fairly long periods of underperformance, that could be due to market cycles rather than the manager doing anything right or wrong,” he explained.
“If Oaktree is underperforming because it’s a deep-value manager, and we know deep value is underperforming, we’re ok with that. We’d actually be uncomfortable if it’s a growth market and [value investor] Pzena is performing very well because it would mean they’re not sticking to the market.”
“We don’t think there’s anything wrong with active managers, on aggregate they underperform, but that’s largely down to their cost,” Norton said.
He argues that Vanguard has an advantage due to its scale and size, large research team, and low costs which give its active managers a lower hurdle to beat.
For example, the ongoing charges figure (OCF) for its active £82.7m Vanguard Global Equity fund, co-managed by Wellington and Baillie Gifford, is capped at 0.48 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
Since inception, it has delivered a total return of 64.10 per cent versus 49.11 per cent in the IA Global sector.