Volatility in markets: looking longer-term

Periods of volatility have an impact on the market – and investor returns, either positively or negatively over the short term. But what about longer-term? Is there power in persevering during periods of heightened volatility?

Following the pandemic-induced turbulence of recent years, 2022 is amid its own turmoil. Geopolitical upheaval is rife in light of the Russia-Ukraine crisis, inflation is proving persistent and supply chain disruptions continue against a backdrop of the tangible effects of climate change. All of this has an impact on the market – and investor returns, either positively or negatively over the short term. But what about longer-term? Is there power in persevering during periods of heightened volatility?

A turbulent start to 2022

A cursory glance at Figure 1 below, the Chicago Board Options Exchange's (CBOE) Volatility Index (VIX) (a measure of the S&P 500 index’ expectation of volatility), market volatility reached a six month high in March 2022.

Figure 1. CBOE Volatility Index (VIX) six month view (December 2021 - May 2022), Source: Trading Economics.

VIX index 6 months

While over the longer term, Figure 2 below shows that periods of volatility are noticeably common.

Figure 2. CBOE Volatility Index (VIX)10 year view, Source: Trading Economics

CBOE VIX 6 months

Stages of high volatility (such as the 2007-2008 global financial crisis (GFC)) are often followed by periods of relative calm, which can reward investors who hold their nerve. As Figure 3 below shows, investors who remained in the market were compensated for enduring downturns, especially those in the inherently ‘riskier’ equities asset class.

Figure 3. Source: Credit Suisse Research Institute Global Investment Returns Yearbook 2017

Cumulative returns

To adequately understand risk and return and the impact of market volatility, it is critical to take a longer term perspective. Further, to appreciate the potential upsides of enduring stormy market conditions.

History and volatility: taking a long-term perspective

Market shifts appear extreme when observing over the short-term, but when you look longer term, trends are revealed. Not only do periods of volatility level out, investors can be rewarded for their perseverance.

In Figure 4 below, we demonstrate some key events in history to show the subsequent volatility the market experienced as well as how investors were compensated for staying in the market.

This has been proven even after devastating events such as the 1990 recession, the GFC and global pandemics. While not without risk, equity markets have proven to be inherently resilient, and volatility (whether positive or negative for investors) is comparatively short-lived.

Figure 4: History of the S&P 500, The U Ethical Australian Equities Trust - Wholesale (UE AET-W) cumulative returns and events in history.

AET vs S&P

The S&P 500 is the chosen benchmark for comparison here as it was established earlier than the ASX 300 accumulation index equivalent. The actual benchmark of the UE AET-W is the S&P/ASX 300 Accumulation Index.

If volatility persists in 2022, what does this mean for investment portfolios?

Recent geopolitical events highlight the importance of actively managed, diversified funds that are structured with a long-term outlook.

At U Ethical (UE), our investment philosophy is centred on a long term focus:

Financial markets and the performance of underlying asset classes are cyclical. Market inefficiencies create opportunities and fundamentals will ultimately drive performance. Investors need to take a long-term view and responsible investment strategies can deliver competitive market returns.

The integration of environmental, social and governance (ESG) factors through an ethical lens also reduces risk and helps identify opportunities. As a responsible investor, U Ethical recognises the value of delivering financial returns and positive impact benefits.

This philosophy also guides our investment process – refer to Figure 5 below. After a series of stringent screens of the investable universe, high quality companies set for long-term viability begin to surface. For example, we have zero tolerance for sectors such as fossil fuels or armaments – tilting instead towards sustainable sectors such as healthcare, technology and renewable energy. Additionally, the team conducts analyses to identify undervalued companies, seeking opportunities for future upside value in the face of market inefficiencies.

Figure 5: U Ethical’s investment process. Source: U Ethical

Investment process

How we manage volatility in our portfolio

As outlined in our philosophy and investment process, our equity portfolios comprise high quality holdings set for long-term viability. We therefore don’t explicitly manage volatility as this is considered even before we invest. For example, we ask the question before investing: how likely is this company going to deliver shareholder value over the longer term?

Taking the example of our Australian Equities Trust – Wholesale product (UE AET-W), the Trust delivered our clients returns (net of fees) of 10.63% over 5 years and 10.32% over 10 years vs 9.38% and 10.10% respectively for the ASX300 (refer to Table 6 below).

Table 6.

Past U Ethical fund performance is not indicative of future performance.
Based on exit price with distributions reinvested, and are net of all fees. From inception to 31 October 2019, performance is that of the U Ethical Australian Equities Portfolio (the Portfolio) which includes franking credits. On 1 November 2019, the Portfolio was transferred into a unit trust, the U Ethical Australian Equities Trust, and performance excludes franking credits. The benchmark throughout is the S&P/ASX 300 Accumulation Index.

Looking at the recent March 2022 quarter, the market saw a strong rally in commodity and energy prices which impacted the UE AET-W’s relative performance. This was predominantly due to sectors in which the UE AET-W is not invested because of exclusions under our Ethical Investment Policy. The total return for the Trust (net of fees) over the quarter was -2.43 per cent, underperforming the ASX 300 Accumulation Index by 4.5 per cent. However, after just a month, comparative performance has stabilised again.

Figure 7 below shows the industry sector exposure of the UE AET-W relative to the benchmark. The Trust’s underweight position in materials, and zero exposure to energy, compared to the benchmark’s higher exposures, meant the benchmark outperformed the UE AET-W during this rally. Occasional variances such as this are not unexpected and are something that all responsible fund managers contend with. Referring again to our investment philosophy, the integration of environmental, social and governance (ESG) factors and our stringent ethical screening also reduces risk and helps identify opportunities set for the long-term. For example, excluding fossil fuels from our portfolio is a strategic decision to help deliver long-term shareholder value, not to mention benefits for society and the planet. We believe that any rallies like those seen recently will be short lived and unsustainable and the sector will soon face risks as the world moves to greener energy sources.

Figure 7: U Ethical Australian Equities Trust – Wholesale sector exposure against the benchmark (S&P/ASX 300 Accumulation Index) as at 31 March 2022. Source: U Ethical.

Sector exposure figure 7

U Ethical’s long-term perspective

Looking at Figure 4 again, the UE AET-W has steadily delivered cumulative returns to clients, while continuing to trend upward with the market despite periods of volatility. In addition to this, the fund doesn’t just aim to achieve competitive risk-adjusted returns for investors over the medium to long-term, but also aims to limit harm and create positive impact for society through the implementation of UE’s Ethical Investment Policy.


Figure 4. Source U Ethical.


In summary, periods of volatility in markets are not only short-lived and common, but investors are compensated for their longer term perseverance. History demonstrates that long term investors, especially those invested in the riskier growth assets such as equities, are rewarded – even after market impacting events.

Responsible investment managers are naturally invested for the longer term – seeking quality, sustainable companies set for long term viability. They are, however still impacted by short term rallies from unsustainable sectors, such as energy, which many responsible fund managers are not exposed to due to their zero tolerance stance on fossil fuels. But this downside doesn’t last long. These portfolio companies continue on their sustainable journey, while mainstream counterparts face systemic ESG risks – damaging shareholder capital gain in the long end.

If you’d like to learn more about our investment process or anything outlined above, please get in touch with your relationship manager or the Client Service Team on 1800 996 888.

Want more Good Returns?

Subscribe to receive the latest ethical investment news.



Article by

Lexie Hume


27 May 2022


Responsible investing

Article by

Lexie Hume


27 May 2022