Higher volatility is overdue, says Wilshire

Active managers that thrive on volatile markets soon may get their day in the sun. Recent data from Wilshire Associates Inc. in Santa Monica, Calif., show just how long those managers have waited. A Wilshire report, “Manager Behavior in a Low Volatility Market,” shows that market volatility in the past three years is well below the 30-year average. From the beginning of 2004 to the end of 2006, volatility in the U.S. market never rose above 10%. The 30-year average stands at 14.3%, and the average volatility for the three years prior to 2004 was 18.8%. After such an extended calm, consultants expect more volatility soon. “We’ve told clients we’ve been in a lower-volatility environment over the last three years,” said David Ritter, senior vice president and principal at LCG Associates Inc., an Atlanta-based consulting firm. “If you believe in historical patterns, you would expect the market to become more volatile.” Consultants already are asking managers how they are prepared for the change in volatility, Mr. Ritter said. “How are you positioning the portfolio to take advantage of volatility or reduce the downside of it?” The Wilshire report does not attempt to predict when volatility will increase; it simply shows how long volatility has stayed low in the U.S. market. Steady and predictable moves from the Federal Reserve, along with consecutive periods of growth in corporate earnings, have caused the drop in volatility, the report states.