Money managers note heightened interest in low-volatility strategies

Managers of low- or managed-volatility equity strategies are reporting a sharp increase in RFPs and finals competitions this year, as the approach continues to fight its way toward the investment management mainstream.

Martingale Asset Management LP will compete in five finals presentations over the next six weeks for its U.S. large-cap managed-volatility strategy, noted William E. Jacques, executive vice president and chief investment officer of the Boston-based quantitative manager.

It's “the first time in our firm's history that we've been in more than two” finals at any one time, he added.

Ross Dowd, senior vice president and head of global marketing with Acadian Asset Management LLC, Boston, reported a similar trend for his firm's global and emerging markets equity managed-volatility strategies. Acadian won a $300 million allocation from an Australian institutional investor last week, and will compete in three finals over the coming weeks for combined assets of $750 million, he said. He declined to name the Australian client.

Analytic Investors LLC, Los Angeles, is competing in three finals with combined assets of $400 million, said Harindra de Silva, president of the quant firm.

That momentum is coming roughly a year or two after a number of investment consultants — including Mercer, Wilshire Associates, Russell Investments and Segal Rogerscasey — began recommending that clients consider the strategy.

Timothy Barron, CIO of Segal Rogerscasey, New York, said there has been “a significant pick-up in searches (for managers of the strategy) ... and we would expect to see more of this.”

Acadian's Mr. Dowd said the global pipeline of likely managed-volatility searches for the coming year stands around $9 billion, but could swell further.

In years past, Europe, Japan, Australia and Canada would have dominated that activity, but this year, U.S. investors are likely to account for more than half of the total, he said.

Martingale, Acadian and Analytic are among the handful of firms with track records of more than three years managing low-volatility portfolios, so even incremental gains in client interest can spawn healthy inflows.

Still, the heightened activity suggests more institutional investors are ready to test the truism that investing in riskier assets is the price that must be paid to enjoy higher returns.

An executive overseeing one multibillion-dollar institutional portfolio, who declined to be identified, said the evidence in favor of the strategy was so compelling that he managed to convince his board to back a test allocation of more than 1% of the portfolio earlier this year. Should the strategy continue to perform strongly, that allocation will grow, he said.

For the past year, which included both a dramatic equity market collapse in the third quarter of 2011 and a strong rebound thereafter, the strategies have either performed as anticipated or exceeded expectations, according to money managers.

For example, Acadian's $2.5 billion global managed-volatility strategy outperformed its MSCI World index benchmark by 13 percentage points for the 12 months ended Dec. 31, but then underperformed the benchmark by 6.84 points during the market's bull run in the first quarter of 2012, according to data tracker eVestment Alliance, Marietta, Ga.

Analytic's $1.5 billion U.S. low-volatility equity strategy likewise outperformed its Russell 1000 benchmark by 13 percentage points in 2011, but then trailed by 5.12 points in the first quarter, according to eVestment Alliance.

Eileen Neill, a managing director and consulting team leader with Santa Monica, Calif.-based Wilshire Associates, said that kind of tracking error is likely to remain a hurdle for many institutional investors, even though the data on low- and managed-volatility strategies is “compelling.”

With pension board members often moving on after three to five years, a strategy that could require five, seven or even 10 years to prove its worth could face continued resistance, Ms. Neill said, adding she hasn't seen any groundswell in client interest.

Even so, the pick-up in finals competitions reported by Martingale, Acadian and Analytic following a quarter in which their returns trailed their benchmarks suggests growing faith that those strategies can make up any shortfalls they suffer in bull markets by losing less than a market-cap-weighted index in falling markets.

Brian Murdock, chairman and CEO of Toronto-based TD Asset Management, predicted those strategies will garner more and more interest as institutional investors become “less benchmark-centric in the way they think about investments.” TD Asset's low-volatility equity assets have more than doubled over the past year to more than C$2 billion (US$1.99 billion),

Terry A. Dennison, Los Angeles-based senior partner and U.S. director of consulting at Mercer, said in that environment, there could be growing interest in pairing low-volatility strategies with high conviction, concentrated equity portfolios in search of efficient trade-offs between risk and return.

With equity risk proving to be all too toxic in recent years, the message that “you can get to the same place, but with less money spent on Pepto-Bismol” should increasingly get a hearing from institutional investors, said Analytic's Mr. de Silva.

Meanwhile, firms that have come out recently with managed-volatility strategies include Chicago-based LSV Asset Management and West Palm Beach, Fla.-based INTECH Investment Management LLC.

Jason Ciaglo, LSV's director, business development, said his firm launched two global equity managed-volatility strategies in February to complement the $868 million LSV managed-volatility strategy the firm brought to market two years ago.

INTECH in October launched U.S. and global low-volatility strategies, seeking market returns with less volatility, as well as U.S. and global managed-volatility strategies, seeking above-market returns with less volatility, said Jennifer Young, chairman and CEO. In March, the firm launched a global dividend low-volatility strategy, she added.

Acadian, meanwhile, added an emerging markets managed-volatility strategy in March 2011.

Acadian's Mr. Dowd said his firm's latest win in Australia should lift managed-volatility assets to almost $3.5 billion. He believes the firm can double its managed-volatility assets over the next 18 months.

Passive strategies are likewise drawing interest.

BlackRock Inc.'s iShares exchange-traded fund business launched four minimum volatility ETFs in October 2011. Especially strong interest in its emerging markets and All-Country World offerings quickly lifting assets in the group to more than $440 million, Liz Tennican, head of U.S. iShares institutional sales, said in an e-mailed response to questions.