Increased volatility tends to come with the territory for rapid growth businesses; potentially exposed to negative events such as cyclical challenges or exogenous shocks. Thematic investing may diversify away some of this volatility. However, even a broad basket of stocks tied to rapid growth names (or a long-time horizon) can be equally volatile as the market.
2021 has been no different as we have already seen significant corrections across some themes. This has been amid a backdrop of broader markets like the S&P 500 continuing to advance. This is not entirely surprising to us given thematic investing typically relies on identifying and understanding structural megatrends that will likely evolve independently of macroeconomic and market cycles. Thus as volatility (of the downside variety) comes and goes, we continue to ask investors to leverage the four quadrant matrix, focusing on, among other things, sales growth.
"When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it."
- Terry Smith -
Apples to Apples: Drawndown & Loss
Further, as most of our investors know, drawdown is a measure of downside volatility that measures an equity’s peak-to-trough decline. Drawdown and loss are not necessarily the same thing. With this in mind our research team have taken a deep dive into the realized average historical forward performance following a variety of sizeable declines (10, 20 & 30%) of these thematic indices:
• Dow Jones Internet Comp Index (Internet)
• Nasdaq CTA Cybersecurity Index (Cybersecurity)
• ISE CTA Cloud Computing Index (Cloud Computing)
• NASDAQ® Clean Edge® Green Energy Index (Clean Energy)
Proof is in the Pudding
• On average, following a 10%, 20% or 30% drawdown all four indices tended to produce above average returns across 3, 12 and 36 month time horizons. 1
• The magnitude of this realized future outperformance tended, on the whole, to increase following a larger drawdown, but also appears more volatile as the drawdown deepens.
• Following a 10% drawdown, the subsequent three months usually saw the highest pick up in performance. On the flip side, after 20% and 30% drawdowns forward performance seems to wait longer with the next 12 months demonstrating the largest uptick in performance.
1 Except with Nasdaq CTA Cybersecurity index which has never experienced a 30% drawdown.
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