Warning correct, despite recovery

Advisers are being told they were right to warn their clients about market volatility earlier this year, even if it proved to be short-lived.

Thursday, November 5th 2015, 6:00AM

by Susan Edmunds

Through August and September there was increased turbulence in equity markets and many took it as a sign that a sustained downturn was imminent.

But then the markets recovered in October. New Zealand equities were up 13.31% in the month, leading the international pack.

Only one developed market, Luxembourg, experienced a further slump in October.

Adviser Janine Starks said it was right for advisers to prepare their clients. "I don't think they were being too hasty, as they weren't telling people to sell, they were pre-empting the usual client squawking when the markets fall. Most mature investors know the drill."

Another adviser, Grant Davies, of Hamilton Hindin Greene, agreed: "It always pays to be ready for volatility, but it also pays to take doomsday commentary with a pinch of salt. There is always someone who is picking a massive market downturn and for the most part they've been wrong. Of course, one will be right eventually and then claim prophetic abilities. The key is to make sure portfolios are well-placed for all market conditions."

Many fund managers have also started to move more of their assets into cash, worried that equity markets are overvalued.

John Berry, of Pathfinder Asset Management, said it was unfair to judge whether that had been a good move over a two- or three-month period. "If you take the view that the market has turned, then it is the right thing to do. You have got to implement what your views are but that doesn't mean the month that you implement it is the month the story will play out."

Starks said she was much more worried about unadvised KiwiSaver members.

Banks reported increased switching activity as sharemarkets slumped and KiwiSaver members moved into more conservative funds.

She said: "Many investors have come to think that KiwiSaver funds only go up. It's been a lucky sequence of events. Now some decent portfolio balances have been built, a major sell-off will see a huge bunch of New Zealanders in panic mode. Few are under advice. As an industry, how do we cope with the need to mass-educate a high volume of people in a downturn?"

She said some people did not even understand they were invested in shares.

"I can't think of any other developed country which was so late to the game with retirement planning and has such a volume of investors prone to erratic behaviour if the markets decline. While they are locked in, we could see them reduce contributions, stop contributions or switch into very conservative funds. All of which will impact their long-term financial wealth."

Tags: equities financial advisers