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One of the more interesting aspects of the market I think investors have to recognize going forward is that we are going to see an increase in the volatility of volatility going forward.
In the past, we have had a relatively low volatility number, in looking at the VIX index.
But we have seen these spikes within volatility. We saw a spike around Brexit; we saw a spike of volatility around the election in November.
But going forward, I think investors have to recognize that active managers are able to take advantage of these volatility moments in a way that passive managers cannot, and it’s going to become more prevalent going forward.
Around the idea of volatility in volatility is the fact that we live in a world today where investors are prone to overreaction, in both the downside and the upside.
And as an active manager, you have to be able to take advantage of those specific moments. And I think that’s key to outperformance going forward. We saw it, believe it or not, in 2016. You saw it in Brexit. You saw it in the election.
And, most importantly, you saw it in the decline in the market in the beginning of last year. But going forward, as we see these micro bursts of volatility, you’re going to see increased volatility in those volatile moments, and investors should be able to take advantage of that. An active manager will be able to take advantage of those moments.
Article by Francis Gannon, The Royce Funds