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Welcome. This website is intended solely for the use of institutional investors, consultants and other professionally recognized financial intermediaries in specific countries. Intech Investment Management LLC (“Intech”), is an investment adviser registered with the United States Securities & Exchange Commission. Intech is not permitted to offer products and services in all countries. It is the responsibility of prospective investors to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions, including the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares or securities, and any foreign exchange restrictions that may be relevant thereto. The products and services referred to in this website are not offered to any person or entity in any jurisdiction where the advertisement, offer or sale of such products and services is restricted or prohibited by law or regulation or where we would be subject to any registration or licensing requirement not currently held by Intech or our affiliates. If Intech does not offer a website for your country, please visit www.janushenderson.com.

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Decline - I am not a wholesale client

Stock and bond markets around the globe have been moving in tandem this year. And in the 2020 market pullback, stock and alternative risk premia strategies were unexpectedly correlated. Such relationships increase portfolio volatility – the opposite of their intent – which is something we might accept in the short-term, at least statistically.

But can investors accept the impact of these correlations on their portfolios?

For institutional and individual retirement investors alike, the higher portfolio volatility translates into higher uncertainty about funding future liabilities. For many corporate treasurers, it may also directly impact balance sheets, drawing scrutiny from investors, creditors, analysts, and the public.

Cross-Asset Class Diversification Isn't Enough

Traditionally, institutional investors address this challenge with MORE asset class diversification; portfolios have become increasingly complex over the years to achieve a nominal 7% return. Unfortunately, this has invited much higher exposure to riskier assets and commensurate volatility.

We contend that there’s a better, less expensive way to increase risk-adjusted return potential. Private equity, real estate, infrastructure, and other alternative investments already make up nearly a fifth of global pensions. This strategy can potentially dampen volatility but also invites other risks, like liquidity risk.

Build Resiliency in Your Equities

We believe investors can tackle the shortcomings of cross-asset diversification by focusing on the asset class that’s likely the largest contributor to volatility: equities. Investors can diversify their equity allocation by employing a long-only equity strategy designed to align with equity return expectations, mitigate funded status volatility, and keep a lid on governance costs: low volatility equity.

Low volatility strategies all have a common objective: less volatility, lower drawdowns, and market-like or -better returns. As a result, they have the potential to improve most portfolios. But what is the proper allocation assuming you plan to retain your overall equity allocation?

Modeling a Low Volatility Allocation

No single asset allocation decision is correct for every plan sponsor. It depends on the maximum drawdown you’re willing to endure and how much potential upside return you might trade for that protection. Nonetheless, we can model the potential effect of incremental low-vol allocations on your total equity allocation when combined with a cap-weighted index allocation.

As shown in the figure below, with just a 30% share of your total equity allocation, a low volatility strategy can potentially reduce your total equity volatility by 20% without detracting from the total return. Indeed, returns actually improved historically.

Volatility vs- Return for Hypothetical Global Blended Portfolios

See Disclaimer for additional information regarding hypothetical performance.

 

Effect at the Total Portfolio Level

But how does this affect outcomes at the overall plan level? Given the large proportion of global public equities in many institutional portfolios, replacing just a third of the equity allocation with a low volatility equity strategy can alter the total portfolio’s risk-return profile and cumulative growth potential.

In the next figure, we examine the effects within a hypothetical example of a modern institutional multi-asset portfolio: 50% public equities, 30% bonds, 10% real estate, and 10% private equity, rebalanced annually. Comparing a 100% passive exposure to global equities versus those where we replace 1/3 of the equity allocation with MSCI World Minimum Volatility Index, the results represent genuine value over time in terms of capital growth, with less volatility along the way.

Effects of Replacing 1/3 of Global Equity Allocation with Hypothetical Defensive Equity Strategies For hypothetical multi-asset portfolios, returns for global public equities reflect the MSCI World Index, returns for global bonds reflect the Bloomberg Barclays Global Aggregate Bond Index, returns for real estate reflect the FTSE NAREIT (All) Index, and returns for private equity reflect the Thomson Reuters PE Buyout Index. See Disclaimer for additional information regarding hypothetical performance.

 

Replacing a third of a passive global public equity allocation with the MSCI World Minimum Volatility Index lowers volatility and maximum drawdown with similar or better returns, resulting in appreciably superior Sharpe ratios. While we’ve kept the total public equity portion of the overall portfolio static in this hypothetical example, the reduction in total portfolio risk actually frees up risk budgets for increased exposure to public equities or other return-seeking assets.

Look for Diversification Where It Matters

Intech knows a thing or two about diversification – it’s the backbone of our investment process. That’s why we always support and advocate broader asset class diversification for portfolios, but it’s also critical to examine better diversification within asset classes, especially equities. Low volatility equity strategies offer that potential.

Intech has been managing low volatility equity portfolios for over a decade now. We offer a deep well of resources on the subject, including how to differentiate and evaluate low volatility equity strategies. Our recent paper, “Low Volatility Investing: Assess, Analyze, and Act” is a great primer on these topics.

 

Assess, Analyze, and Act on Low Volatility Investing A Low Volatility Investing Primer Read More

 

This information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of wholesale clients as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information you represent that you are a wholesale client.

The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date of the blog, and may be superseded by subsequent market events or other conditions.

The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. This blog should not relied on as the sole basis for investment decisions.

While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this blog. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

Past performance does not predict future returns. Investing involves risk, including fluctuation in value, the possible loss of principal, and total loss of investment.

Hypothetical performance results presented are for illustrative purposes only. Hypothetical performance is not real and has many inherent limitations. It does not reflect the results or risks associated with actual trading or the actual performance of any portfolio and has been prepared with the benefit of hindsight. Therefore, there is no guarantee that an actual portfolio would have achieved the results shown. In fact, there will be differences between hypothetical and actual results. No investor should assume that future performance will be profitable, or equal to the results shown. Hypothetical results do not reflect the deduction of advisory fees and other expenses incurred in the management of a portfolio.

Low volatility strategies are likely to underperform the index during periods of strong up markets and may not achieve the desired level of protection in down markets. Indices are not available for direct investment; therefore, performance does not reflect the expenses associated with the active management of an actual portfolio.

This blog should not be copied, distributed, published, or reproduced, in whole or in part, without permission from Intech.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data shown. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This information has not been approved, reviewed, or produced by MSCI.

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