JAMES TURP: Managing portfolios when sudden, sharp risk events hit the market

The global volatility index (VIX) measures how quickly the market expects stock prices to change, with a baseline of about 10 when markets are calm. In 2025 we’ve seen it spike above 50, and frequently hover about 40 — a clear sign of just how anxious markets have become.

In my 30 years of watching markets this year has stood out as an anomaly. We’ve been navigating waves of uncertainty driven by geopolitical tension, trade disputes and trade policy whiplash. Markets can usually digest bad news; what they struggle with is unpredictability. And volatility remains one of the hardest risks to price or prepare for, precisely because it reflects not just events, but the fear of what might come next. 

At a recent conference at which I addressed an audience of key SA financial advisers, I was asked: “Should a portfolio manager position for political outcomes?” My answer was “yes” and “no”. 

We know the textbook definition of politics is “a set of activities associated with making decisions in groups or other forms of power relations between individuals, distributing status or resources”. These are highly emotive matters — and emotions impair judgment, obscure objective thought and often lead to biased or irrational decisions. 

In many ways this is the opposite of how consistent outperforming investment professionals operate. Pragmatism rules. But in the current environment perspective matters; it’s critical to anchoring decisions.

Foreign investors may view an asset differently to local investors, whose lived experience introduces an emotional overlay. Consider load-shedding and the toll it takes on citizens. We have observed a strong correlation between market performance and load-shedding, particularly at its most severe stages, and not only due to its economic impact. 

SA’s political profile has been unusually prominent on the global stage. We’ve had to consider politics, politicians, voting patterns and predictions. Political campaigns often make promises that are hard to deliver. Imagine a young person watching a blue-light brigade for travelling politicians, while commuting to work in a crowded taxi. Voter apathy can follow; we saw voter disengagement exceed 40% in last year’s general election. Forecasting outcomes becomes difficult when so many opt out.

Another perennial consideration is how portfolio managers should respond to rumours and leaks. Just days ago reports surfaced of Israel planning to attack Iran. The market reaction was sharp. Should we respond to every rumour or report when investing for the long term? The answer isn’t always clear. It comes down to risk management and the manager’s judgment. 

One of the most pivotal events in democratic SA’s history was “Nenegate” — when then finance minister Nhlanhla Nene was abruptly removed and replaced in a weekend. I recall hearing rumours beforehand and discussing them in our morning strategy session. At the time it seemed inconceivable, but we know how it played out. 

In hindsight, reacting may have saved investors. But we also have a responsibility not to act on speculation without due consideration. As it turned out, prominent market participants were later quoted as having known about Nenegate in advance and prepositioned; accordingly, a clearly prohibited activity known as “front running”. 

This is not an SA problem alone. We have seen international events that shook the market — and continue to do so.

Polling has proven to be an unreliable guide to major political outcomes. There are many reasons for it, but accuracy is often skewed by sampling. Brexit wasn’t supposed to happen. Nor was Donald Trump’s first presidential win — at least not according to the polls. In the case of Brexit, the polling sample overrepresented younger voters who didn’t show up on the day. 

Similarly, just days before Russia’s invasion of Ukraine reports of “military drills” near the border were arguably a clue of what was to come. Should more attention be paid to this type of signal? It ultimately depends on the portfolio in question — its positioning, performance and risk levels at the time. 

As portfolio managers and investors we need to interrogate our information sources, especially in an age in which search engines and artificial intelligence can subtly influence the content we consume and the decisions we make. 

For binary risks such as elections, legal verdicts or rumours, it’s wise to stay close to our colleagues in the economics team: to model a range of outcomes, measure the gap between expectation and possibility and consider the likely market response to each. The efficient market hypothesis says all known information is priced in. That makes contingency planning across multiple scenarios a sound strategy. 

Our duty was, and remains, to protect investors and their capital. For the SIM Bond Fund, which had been running underweight relative to the all bond index earlier in 2024, we shifted to a neutral benchmark position before the announcement of the government of national unity. Once the favourable outcome was confirmed, we increased exposure to SA bonds, as shown in the chart. 

Politics can be successfully incorporated into an investment strategy over the long term. Understanding a government’s fiscal stance and monetary policy direction is critical. 

As asset managers, our first obligation is always risk management — not unnecessary speculation on behalf of investors. Only once risks are neutralised should the pursuit of alpha, or excess returns, come into play. 

By having a clear, preconsidered strategy for potential risk events and their outcomes, we can respond in a way that’s informed, timely and in the best interest of investors.

When the stakes are high, neutralising risk first has proven — and will continue to be — a rewarding long-term strategy. 

• Turp is head of investment strategy and fixed income portfolio manager at Sanlam Investments.