Inflation and market volatility: Wesleyan’s Marc O’Sullivan asks where do investors go from here?

by | Jun 14, 2022

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Marc O’Sullivan, Head of Investments at Wesleyan Assurance Society, the specialist financial services mutual, highlights an increasingly popular solution to today’s investment dilemmas for advisers so that their clients can maximise time in the markets

Recent global and domestic events will have made many investors nervous.

The UK economy is being buffeted by rampant inflation, with households seeing the largest rise in prices in more than 30 years.

At the same time, the war in Ukraine has prompted a surge in market volatility, driving up commodity prices and prompting a fall in some stocks.

 
 

Some with money in the market may have already seen the value of their holdings fall, and many others will be concerned that their investments may well do the same in the current environment.

More investors could be shaken by daily swings in asset prices and, understandably, be concerned about potentially losing money in the short term.

Advisers will be a first port of call when it comes to giving support and guidance to their clients on how to proceed in these volatile times.

 
 

How should people be managing their finances in such market conditions? And what options are there for those now looking to manage risk while still achieving the best possible growth in their savings?

Staying the course

In worst cases, clients experiencing market volatility and feeling the pinch in the cost of living may be tempted to take money out of the market to cover their day-to-day needs.

 
 

But this can be short-sighted. Even a few hundred pounds withdrawn now could mean missing out on annualised returns in years to come, as savings won’t benefit from long-term compounding.

At the same time, investors could miss out on potential rallies in their assets’ value. The period ‘out of the market’ doesn’t need to be long at all for investors to miss out on a big scale jump.

As an example, investors that held an initial investment of £10,000 in the Wesleyan Life Managed Fund over the 20 years leading up to 31 December 2021 and who missed just the 10 best days of performance, would have generated a return that was £11,000 lower than others who had consistently kept their savings in1.

 
 

In short, for those that have money in the market, it will be important to be patient and hold steady. History shows investment decisions are best taken with a long-term perspective.

Smart choices

But that doesn’t mean that strategies can’t – and shouldn’t – be adapted to better meet clients’ current needs and circumstances.

 
 

Good advice is, of course, predicated on suitability. And a big part of the value that advisers bring, and a factor that will be highlighted now, perhaps more than ever, is helping to match investment strategy to an individual’s preferences, life goals and attitude to risk.

Where advisers have nervous clients, concerned about large swings in their investments and seeking a middle path through the sometimes steep rises and falls in the market, investing in a With Profits Fund may be a good option.

This type of fund uses a mechanism to smooth the ups and downs of market volatility to more evenly distribute returns generated during peaks and troughs. Over the long term, investors should see meaningful growth on their money, while being cushioned from any dramatic falls in the market – a worthy option for those who are happy to invest, but who would prefer not to see large, volatile swings in their investments’ value.

 
 

At Wesleyan, our flagship With Profits fund gives investors a chance to invest in a moderate-risk fund and benefit from this ‘smoothing’ mechanism.

And there are some added benefits that our structure, and business brings.

As a result of managing our capital to a much higher level than the minimum requirements, along with enhanced risk management2, we are able to pursue a strategy of selecting investments that we believe will grow in value over time, even if they are currently out of favour with other investors. And, within the fund’s wider diversification, it means we can position the fund to hold assets that we believe should allow us to generate higher returns over the long term.

 
 

On top of this, as a mutual, without shareholders, investors in our With Profits fund have the opportunity to share in the Wesleyan Group’s surplus capital distribution.

Path ahead

These are uncertain times, and clients will be turning to advisers for support in navigating choppy waters.

 
 

It will remain essential that – where they can, and where it is suitable – clients maximise time in the market.

With the right strategy, and by making use of the full range of investment options available, clients will be able to continue to benefit from the potential for long-term growth, with renewed confidence.

The value of investments and any income can go down as well as up. Investors may get back less than they invest.

 
 

1: Wesleyan Life Managed Fund data at 11.04.2022

2: Wesleyan Annual Report and Accounts 2021, page 26, section ‘Financial Strength’: https://www.wesleyan.co.uk/about/reports-and-accounts

 

 

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