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Volatility – these are best of times, these are the worst of times.

Volatility has the potential to significantly alter the value of fund assets. In what have been at times volatile market conditions Appian funds continue to do well in 2015.


Fund Performance Year to Date 31.05.2015

Appian Value Fund


Appian Equity Fund


Appian Small Companies Opportunities Fund


In this month’s bulletin we take a brief look at the main reasons behind the recent spike in fixed income market volatility, where after a long and protracted low volatility rally, volatility has suddenly broken out and bond yields have moved substantially higher in a short period of time.  “Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline” Philip Roth.

Global bond yields tend to move considerably higher ahead of a US tightening cycle. In June 2003, the 10yr Japanese government bond (JGB) hit a then record low after a long and protracted low volatility rally, volatility suddenly broke out and yields moved substantially higher in a short period of time. Back then the US Federal Reserve (FED) were also discussing when to raise rates off their cyclical low. This backdrop is something not that dissimilar to where we find themselves today, at least from a German perspective. After a long and protracted low volatility rally German 10 year yields hit an all-time low of 0.049% in April before a sharp correction saw them rise to 0.77% in a matter of weeks.

The ECB’s quantitative easing programme rather than reducing volatility is helping to augment it by suppressing the overall level of bond yields and reducing market liquidity, as the free-float of Euro government bonds is reduced by their actions. European bond yields, even at current levels, aren’t compelling from an investment point of view and make little economic sense under any traditional valuation metric. Risks and returns appear asymmetric barring another crisis induced event. Duration risk remains the biggest single and often most underappreciated risk by fixed income investors.

One of the unintended consequences of trying to put the financial sector on a sounder footing, in the aftermath of the global financial crisis (GFC), has come at the cost of fixed income market liquidity. By increasing the amount of capital that banks are required to hold, banks have retreated from traditional market making roles in fixed income products, shrunk their overall balance sheets and ultimately their fixed income inventory.

Changing market dynamics and investor behaviour, momentum and high frequency trading strategies, combined with the exponential growth of passive asset management, liability driven investments (LDI’s) and exchange traded funds (ETF’s) have all amplified the situation. Ultra-loose monetary policy and the low volatility environment has helped foster a sense of complacency at a time when overall market liquidity has shrunk considerably, leaving the market more susceptible to sharp “flash” volatility corrections.  Passive fixed income fund managers, LDI’s and ETF’s who are all restricted by their approach and benchmark and have no option but to buy or sell securities regardless of their economic value in response to fund inflows or outflows.  This can cause market prices to overshoot, i.e. selling after significant market falls or buying into an already well established market rally.

Whether Central Bank monetary policy intervention proves successful will ultimately depending on the level of economic growth and inflation. Deflation fears have subsided and given way to reflation expectations as forward looking inflation indicators have risen sharply over recent months. Not surprising given their correlation with oil prices, which after the dramatic falls witnessed last year are currently up 50% from a low of $40 a barrel. Rising real yields were a necessary condition for nominal yields to back up from their recent lows.

Political Risks remain elevated and have the potential to move markets in either direction. Nowhere is this more prevalent than in Europe where the Greek situation remains unresolved. Time is fast running out for a resolution and the potential for an accident with unintended consequences remains high. The market remains complacent re “Grexit” in our opinion.

Despite record levels of government and corporate debt issuance over recent years a real lack of genuine market liquidity coupled with central bank quantitative easing programmes are having a profound effect on overall pricing dynamics and market movements within the fixed income space. Intra-day volatility is likely to remain elevated and continue in the near term. It’s going to be a bumpy ride for fixed income, as we all get weaned off this unprecedented level of monetary accommodation, best fasten your seatbelts!!

WARNING: The value of your investment may go down as well as up. Past performance is not a reliable guide to future performance. These investments may be affected by changes in currency exchange rates.

Appian Asset Management is regulated by the Central Bank of Ireland. No part of this document is to be reproduced without our written permission. This document has been prepared and issued by Appian Asset Management on the basis of publicly available information, internally developed data and other sources believed to be reliable. It does not constitute an offer or an invitation to invest, or the provision of investment advice. No party should treat any of the contents herein as advice in relation to any investment. While all reasonable care has been given to the preparation of the information, no warranties or representation express or implied are given or liability accepted by Appian Asset Management or its affiliates or any directors or employees in relation to the accuracy fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. 

Appian Unit Fund Prices  
2 June 2015 

Appian Value Fund          142.76                  
Appian Equity Fund         170.60   
Appian Small Companies Opportunities Fund      175.44
Appian Liquidity Fund    106.45

For more detailed information on each of our funds click here

Patrick J Lawless
Managing Director
John Mattimoe
Head of Equity Analysis
Eugene Kiernan
Head of Investment Strategy
Gareth Henson
Portfolio Manager
Pat Kilduff
Head of Economic Analysis
Frank O’Brien
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Conor Fleming
Business Development Manager
Tel: (01) 662 3988 direct
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John Flavin
Senior Relationship Manager
Tel: (01) 662 4053 direct
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