If minimum-volatility strategies begin to move to being a mainstream offering from niche product this year, interest from Japanese institutional investors could be a major factor, money managers say.
Pending changes in Japanese accounting rules that will move pension shortfalls onto corporate balance sheets are sparking a spike in interest there, according to quantitative managers with minimum-volatility strategies. These strategies are portfolios of low-beta stocks designed to lose less ground in market downturns than they give up during rallies.
The latest draft proposal by Japan's Accounting Standards Board earlier this month would do in that country what recent moves by the Financial Accounting Standards Board are doing in the U.S. — force companies to recognize the funded status of their pension plans on their balance sheets — as early as 2012, said Shintaro Kitano, a Tokyo-based senior actuary with Mercer Japan.
The pending switch to mark-to-market accounting is helping make minimum volatility “all the rage” in Japan, said Larry Pohlman, the Boston-based chief investment officer of Stockholm-based Alfred Berg Quant Equity. Mr. Pohlman recently returned from three days of seminars on the strategy in Tokyo, Osaka and Nagoya. “Everybody is looking at it right now,” he said.
While most Japanese institutional investors are still studying the strategy, some have begun pulling the trigger.
Analytic Investors LLC has gotten two mandates in the past month from Japanese institutional investors, lifting its total from that country over the past six months to four, said Harindra de Silva, president of the Los Angeles-based quant firm.
With those wins, its first from Japan, Mr. de Silva said Japanese mandates now account for a quarter of Analytic's combined client base for its U.S. low volatility equity strategy, launched in January 2005; the global version of the strategy, launched in October 2006; and its Europe and MSCI Kokusai versions, launched within the past six months.
The two older strategies accounted for roughly $1.2 billion of Analytic's $9.3 billion in client money as of Dec. 31. The U.S. version, with $756 million, dropped 29.1% in 2008, less than the 37.6% fall for its Russell 1000 benchmark, while rebounding 13% in 2009, as the benchmark was soaring 28.4%. For the two-year period, the strategy matched the benchmark.
Mr. de Silva said he's traveling to Tokyo this week to talk with investors there about Analytic's low-volatility strategies.
Interest in managed-volatility strategies “picked up very, very robustly” in Japan in 2008, and has continued since then, said Theodore Noon, a vice president of sales and marketing with Boston-based Acadian Asset Management LLC, who leads that firm's activities in Japan.
While Acadian's managed-volatility strategy landed only its second big Japanese corporate client two months ago, the companies there moving into the strategy are thought leaders — sophisticated investors whose portfolio decisions will attract broader interest, predicted Mr. Noon. He declined to name Acadian's clients.
With the latest additions, Acadian's two managed-volatility strategies have combined assets of $1 billion, said Churchill Franklin, Acadian's executive vice president and director of marketing, sales and client service.
The bigger of the two — Acadian's global managed volatility strategy, which grew to $524 million in client assets between its October 2006 launch and the end of 2009 — dropped 24.4% in 2008 when the MSCI World benchmark plunged 40.7%, while rising 10.1% in 2009, when the benchmark soared 30%. For the two-year period, the strategy beat its benchmark by an annualized 3.49 percentage points according to performance tracker eVestment Alliance, Marietta, Ga.
Ric Thomas, a senior managing director and head of State Street Global Advisors' enhanced equity group in Boston, said interest in managed-volatility strategies is definitely picking up this year, now that the market's rally has revived worries about the “left tail risk” that another bout of downside volatility could spawn.
Accounting changes in Japan might be a factor, but broader trends driven by the need to control risk are prompting investors everywhere to dip their toes in the managed-volatility waters, Mr. Thomas said. Adopters of liability-driven investment strategies who remain dependent on the equity risk premium for a portion of their portfolios to close funding gaps can turn to minimum-volatility strategies as an alpha source, he noted.