MARKET VOLATILITY UPDATE



Retirement Portfolios & Dynamic Volatility Management

The Scottish Widows Retirement Portfolio Funds (RPF) feature a de-risking process called Dynamic Volatility Management (DVM).

DVM is designed to kick in when equity market volatility increases significantly, and is determined by:

  • Taking as a starting point a market volatility threshold, initially set at the 60th percentile of average historic volatility.
  • Adjusting based on the equity performance over the previous rolling 52 weeks.

If there has been positive market performance, which there was for 2019, for example, the dynamic threshold is raised because the RPF are designed to tolerate more volatility after a period of growth. Conversely, if the RPF have experienced losses, which we saw through the second half of Q1, that will lead to a lower threshold, to allow de-risking to start earlier.

The DVM threshold is currently activated; as a result, a portion of the RPF equity content remains de-risked.

As of the morning of 26 May, the percentage of de-risked equity content was 54.5%, a decrease from 58.1% on 18 May. The dynamic volatility threshold was 12.2%, equity volatility was measured at 26.9%, and the 52-week market return was -2.66%.




PERCENTAGE OF DE-RISKING IN THE RETIREMENT PORTFOLIO FUNDS

18 May 2020

58.1%

19 May 2020

55.9%

20 May 2020

56.3%

21 May 2020

52.7%

22 May 2020

54.5%

DVM data is subject to change daily, as market conditions can change rapidly and de-risking may switch off again quickly. We are working closely with Schroders, our strategic investment partner, to monitor market conditions and position the RPF accordingly.

Long-term investing

Investing – in equities in particular – should always be considered with a medium to longer-term horizon. While the causes of current market stress are outside of the ‘norm’, equity markets have demonstrated over many decades their ability to recover from short-term troughs and deliver strong returns for investors over the medium to long-term.

In terms of our own core multi-asset fund range, it’s important to note that we have not made any changes to the long-term positioning of our funds based on what might be (in investment terms) a short-term, hard to predict, phenomenon. Our asset allocation maintains a medium to long-term investment horizon. Market downturns are a natural part of investing, and we continue to believe that equities still offer attractive opportunities for growth over the long term.

Volatility: Retirement Portfolio Funds – latest update on our Dynamic Volatility Management (DVM) process.

Dynamic Volatility Management status (PDF)