Equity market turbulence is a term we've become all too familiar with in 2016.
Continued volatility in global markets has sparked meteoric interest in low-volatility equity strategies, portfolios constructed mostly based on estimates of volatility rather than returns, enabling investors to reduce market drawdown and improve performance efficiency. Assets invested in low-volatility equity strategies have grown by 46% a year since December 2010.
Investors continue to face the quandary of wanting to invest in equities, as it is a core return-generating asset class, but don't want the potential volatility risk with which it is associated.
Is it possible to meaningfully lower the absolute risk of investing in equities without sacrificing returns? The short answer is yes, through low-volatility investing.
Low-volatility investing provides risk reduction to investors without sacrificing the growth potential of equities. For plan sponsors, this allows for reducing total risk by lowering the volatility of return-generating assets within the overall plan, while meeting funding-status and short-term funding requirements. For individual investors, it provides the potential for the capital appreciation they need for retirement and the downside protection they desire during periods of market turbulence.
The two key benefits of active low-volatility equity strategies are:
- The potential to tap into a proven alpha source that minimizes risk subject to a return in excess of a benchmark; and
- The potential for a better trade-off between risk and return in an equity portfolio, since these strategies are not required to stay close to the market-cap-weighted index.