The return of volatility presents opportunity

Stephen Groff's picture

While the past couple of weeks stand out in investors’ minds as unique, it is actually the preceding months that have set records.

Before the selloff began, the market was exhibiting the following characteristics – several of which were noted in Brandon Snow’s year-end blog, posted on December 15:

1) At 395 days, it was the S&P 500 index’s most ever consecutive days without a >5% setback. 

2) Cash levels continued to hit new lows and net exposure to equities have been hitting cycle highs. 

3) Across several brokerage platforms (E*Trade, Schwab, etc.) the number of new brokerage accounts, client activity and trades had been surging. 

Source: Bloomberg, January 20, 2018
4) Valuations reached elevated levels on an absolute basis and were hitting cycle peaks. 

Source: Bloomberg, February 12, 2018

5) The short VIX trade was in full force, before it came to a screeching halt.

6) According to Bank of America Merrill Lynch (BofAML), global equity fund flows had increased to record levels. They have since reversed. 

7) Anecdotally, most investors and advisors agreed that “equities are expensive”, but saw no catalyst to stop the momentum-driven rally.

While these items were concerning (see blogs: Defensive positioning in our most risk-averse portfolio, Year-end review: From trepidation to speculation, Is FOMO driving this market?), it was due to the fewer number of attractively valued opportunities in the markets that we have been holding elevated levels of cash. 

The upside of volatility is that more opportunities are now presenting themselves. We are pleased to see rationality returning to a market that has been highly driven by momentum and non-fundamental factors and have been active across the dividend suite, putting some real cash to work. To be clear, the fact that we are putting cash to work is not because we have any particular short-term macroeconomic insight; it is because we are finding specific cases of excellent businesses at prices we feel comfortable paying.

The selloff has been relatively broad-based with correlations rising. This has resulted in great businesses being punished alongside those that present more risk or are generally of lower quality. Here are a couple of businesses we have added to after seeing an improvement in their risk/reward ratio. It is important to note that our team regularly reviews targets to incorporate new information and changing market conditions.

The decline in the share price at a time when fundamentals are broadly unchanged has resulted in a better risk/reward. We have been able to add to this position during this period of volatility.

Despite this stock being off only modestly, both our upside and downside target increased because of an improved fundamental outlook (reported solid numbers with an improving capital allocation pipeline).  When combined with the new (lower) price, the risk/reward has improved materially.

Thank you again for your support. Our investment team will continue to apply our fundamentally based investment process to whatever market conditions we find ourselves in. 


Stephen Groff


This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This commentary may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Cambridge Global Asset Management is a division of CI Investments Inc. Certain funds associated with Cambridge Global Asset Management are sub-advised by CI Global Investments Inc., a firm registered with the U.S. Securities and Exchange Commission and an affiliate of CI Investments Inc. Certain portfolio managers of CI Global Investments Inc. are associated with Cambridge Global Asset Management.

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