Systematic trading that encouraged high volatility over the past week has benefited stock pickers, according to John Pearce, chief investment officer of UniSuper.

The Dow Jones Industrial Average index fell by 3.56 per cent on August 24, one of its largest ever one day falls creating stock picking opportunities for funds.

Pearce said the falls were heightened by CTA trading, which use computers to determine buy or sell decisions, following momentum, volatility or risk parity strategies.

The move allowed UniSuper to purchase stocks it previously felt were over-priced.

Pearce said: “You know that [systematic trading] is gripping the market when you are seeing these big liquid blue chip stocks being hammered. That it is because the CTAs are unable to sell the futures because their limit is down, so they are using their proxies which are the blue chip stocks which should not have been hammered at all.”

He described the volatility as rewarding the fund’s patience in avoiding purchasing such stocks at higher valuations, but he equally recognised market will have spooked some members into switching out and crystalizing losses.

Pearce saw the falls in markets as a negative reaction to the Chinese government’s decision to devalue its currency by 2 per cent; investors saw this as a sign of “desperation” he said.

Brian Singer, partner and head of dynamical allocation strategies team, William Blair, who is visiting Australia from Chicago this week, urged investors to see fundamental value as a long term concept in light of recent volatility.

“It is important to know what the economy is doing over the long term, but in the short term you can take advantage of the market’s mis-perception – China’s growth is slowing and the world collapsed. That is not a sustainable approach,” he said.

Over the long term William Blair thinks that China’s growth will be around 5 to 7 per cent.

“In the short term if the market is focusing it’s attention on a 3.5 per cent reduction in China’s currency then we think that is an opportunity.”

However while the prices are below fair value, and present an opportunity, there is too much uncertainty and opaqueness.

William Blair typically targets around 10 per cent volatility in its portfolios, but at the moment it is taking below average risk, with volatility around 6 per cent.
“We are very cautious right now,” Singer said.

Rob Hogg, senior consultant at Frontier Advisors, echoed Singer’s views by reporting a sharp negative shift in investor sentiment to China.

Where investors had been quick to believe in the country’s growth figures without too much investigation of the figures, he said, there was now a much greater scepticism of China after the recent spate of bad news.

Hogg said market sentiment was widely interpreting the depreciation in the Reminbi as a step towards a market determined currency. He said, it is feared that if capital controls are relinquished along with such a move, then there could be a greater flight of capital out of China, which would further lower the currency.

 

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