March Delivers a Painful Reminder About Equity Risk

The war in the Middle East may have dominated markets, but we will leave the rights and wrongs of that to others. What cannot be ignored, however, is the war's impact on markets.

Investors have spent the past few weeks being whipsawed by Trump's threats, followed by regular backdowns, deadline extensions, and policy reversals. Whether it is strategy or theatre, policy delivered by social media posts unfortunately dominates the message in the short term. Uncertainty has been the story, and markets have responded accordingly.
 

March was ugly. The ASX 200 Total Return Index fell more than 7%, while the S&P 500 fared slightly better, but still dropped almost 5%. Those are the sort of monthly numbers that remind investors, very quickly, that equity markets do not rise in a straight line forever.

Against that backdrop, and with almost 40% of funds having now reported their March performance, equity-based funds on average have tracked slightly better than their respective indices. On the surface, that sounds reassuring. But as we noted in last week's Hedge Clippings, averages can be misleading.

The old saying still applies: if your head is in the oven and your feet are in the freezer, on average you are comfortable. In reality, you are experiencing uncomfortable extremes. Fund returns can look much the same. A respectable average can mask some fairly brutal outcomes.

And there has been plenty of pain at those extremes. Only 11% of the funds reporting so far have produced positive returns for March. That is the bad news. The better news is that nearly 55% of equity-based funds have outperformed the ASX 200. In other words, while many managers still lost money, a decent number lost less than the market itself, and the best have protected their investors' capital to a significant degree.

That said, there are also plenty of funds sitting in minus double-digit territory, and their investors will have received a sharp reminder that diversification is not just a nice idea for calmer times. After two or three years of equity returns north of 20% or more, it is easy to get carried away and assume the good run will continue indefinitely.

It rarely does. Which is why diversification across asset classes still matters. Bonds, credit and fixed income may seem dull when equities are flying, but they are there for precisely this sort of environment. March has been another timely reminder that sensible portfolios are built not just for the good times, but for the uncomfortable ones too.

Which is another convenient reminder to log in to FundMonitors.com and use the combination of tools to set up - or update - a Watch List. From there, select funds to create a series of Model Portfolios to track and analyse fund and peer group performances, including each fund's relative Star Ranking.