Investment:Volatility Is Your Friend By Gareth Milliams

The stock and equity fund investor is always going to be vulnerable to losses during recessions. There are so many factors that can make a single stock or an entire market fall; whether it be disappointing earnings, declining profits, increasing losses or more general financial unhealthiness such as a fall in national GDP or even a perception of weakness.

Investing into a single stock or equity fund is a declaration of faith. It is an affirmation of a belief that the share or unit will be worth more when sold than when bought. To achieve that aim, all the positive financial ducks need to be in a row. Perception has to be ready to strengthen and that sentiment has to be translated into the physical purchase of goods and services. Moreover, those goods and services need to be sold at a healthy margin.

Only then can our equity funds show profit.

Unfortunately we are having to constantly battle a 7 year cycle of boom bust. For example:

2008: Global Financial Crisis

2001: Global Recession

1994: Mexican Peso Crisis

1987: Black Monday

1980: Global Recession

1973: Oil Crisis

1966: Global Recession

Investment can be hazardous (to say the least) for the average punter. However, those of you who invested with me were out of the equity markets in August 2008. We preserved capital and kept our powder dry.

The issue that we face now, is what to do with that saved money? We have bought some high yield bonds and will look (when appropriate) to buy more (probably tier 2+) in the future. We will buy these assets because they offer real value at discounted prices.

Last week I met with two senior executives of Friends Provident International. They told me of a new fund that they are launching with Credit Agricole which invests in the volatility created within the S&P 500, DJ Eurostoxx 50 and the Nikkei. Weightings are 50%, 30% and 20% respectively.

The basic principle is simple:

When volatility is high, they are short and when volatility is low, they go long. The results have been stunning. In 2008, the CAAM Volatility World Equities fund returned 26.84%. 2009 has also been positive YTD.

It is daily traded and marked to market with daily pricing and redemption and has an institutional class. It is available via the Reserve portfolio bond and as a mirror fund in Premier and Premier Ultra.

This fund is not designed to be a core profit driver but as a satellite holding with a 10% position.

Below is its chart since actual inception (please click to enlarge to full size):

I think that we can all agree that the recovery will be volatile. Happy days are not quite here again and it will be a bumpy road until we get there. This fund is designed to smooth those bumps and ensure that you get there wealthier and in comfort.