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Short-term low volatility boosts portfolio efficiency

Risk-adjusted returns across institutional investors have benefited from a low volatility environment over the past five years. Median five-year Sharpe ratios, the measure of a portfolio's risk premium over its standard deviation, are almost double their corresponding 10-year figures, with Taft-Hartley defined benefit plans leading the major institutional categories.

Public defined benefit plans have been slightly more efficient than corporate defined benefit plans over both periods. Endowments and foundations lagged the selected categories.

Across the total universe, the two-year Sharpe ratio spikes relative to the other trailing periods, representative of the low volatility period over much of 2017. The shorter one-year period Sharpe declined as a result of higher volatility in the first quarter of 2018.

MSCI's InvestorForce Plan Universes include more than 2,300 plans representing more than $3 trillion in assets.