A Case For Global Managed Volatility Alpha Strategy

Transcription

1 A Case For Global Managed Volatility Alpha Strategy Active Equity The True Objectives of Investors It is common to hear investors define their investment objectives as seeking the greatest risk adjusted returns. Generally, the desired return is a long-term goal needed to reach a particular objective, such as meeting a liability stream, funding some operation, or beating inflation. The risk objective involves minimizing the volatility of the return trajectory. Research conducted by State Street Global Advisors (SSGA) suggests that cap-weighted benchmarks do not offer investors the optimal balance of risk and returns, and that in fact it is possible to manage an equity portfolio to deliver returns with significantly less risk than one that is managed to a benchmark. We have observed higher volatility stocks underperforming lower volatility stocks in different time periods across various markets both emerging and developed markets. This is not a new phenomenon or a short term play for the times. There are a number of plausible explanations for this anomaly, many of them found in the field of behavioral finance which tries to explain the imperfect world where investment decisions are made: the gaming effect of asset managers incentivized to generate high returns by betting big; the glamour effect of investing in stocks that attract the headlines; the herding effect due to tracking error constrained managers, which can lead to a prevalence of market-like portfolios. In addition, limitations to leverage force asset owners to invest in riskier stocks to meet their returns objectives. Building Better Portfolios for Investors SSGA has created a solution that puts investors objectives at the center of portfolio construction, instead of a benchmark. The Global Managed Volatility Alpha strategy (GMVA) differs from most other long only equity strategies because it is benchmark unaware and risk aware. This means the strategy is not constrained by the benchmark in its portfolio construction, thus providing flexibility to focus on investment growth opportunities and to manage the total portfolio risk. GMVA s objective strives to give investors a smoother ride in reaching their investment objectives. Put simply, stronger returns with less total risk. Figure 1: Standard Performance Period GMVA Net Return 1 (%) MSCI World Index 2 (%) Return Difference (%) Since Inception* Year To Date Year Return Year Return Year Return Year Return Year Return N/A N/A N/A Source: State Street Global Advisors (SSGA) as of 3/31/216. * Inception date January Returns greater than one year are annualized. Returns represent past performance and are not a guarantee of future results. Current performance may differ from the performance shown. Returns shown are asset-weighted using composite member market values, where the composite member s return calculations are timeweighted, reflect the These performance figures (i) are provided net of actual trading, audit, custody, administrative and legal fees and expenses; (ii) beginning on 9/3/214, adjusted quarterly to reflect the highest investment management fee on the actual fee schedule, inclusive of incentive fee, if any, of any account within the Composite ( Management Fee ) at the relevant time; prior to 9/3/214, adjusted for an assumed investment management fee, which is equal to or higher than the Management Fee (except in each case certain small accounts-subject to a minimum investment management fee-may have incurred an actual investment management fee higher than that fee assumed in calculating the performance shown above); and (iii) reflect all items of income, gain and loss (other than unrealized gain or loss on units of the securities lending pools held by any portfolio in the Composite). 2 expenses. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in US dollars. It is not possible to invest directly in an index. The calculation method for value added returns may show rounding differences.

2 Figure 2: Potential Benefits of Investing % Figure 3: Rolling 36-Month Standard Deviation of Returns Standard Deviation (%) GMVA Net Return GMVA MSCI World Index MSCI World Index Source: SSGA, FactSet, as of ember 31, 215. Past performance is not a guarantee of future results. The performance figures contained herein are provided on a net of fees basis and reflect the deduction of advisory or other fees which could reduce the return. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in US dollars. 213 Source: SSGA, FactSet, as of March 31, Mar 216 The performance figures contained herein are provided on a net of fees basis and reflect the deduction of advisory or other fees which could reduce the return. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in US dollars. Maintain and Grow Your Portfolio GMVA focuses on actively delivering returns to investors while managing the level of total risk. Through a full market cycle it is expected that this approach will likely result in strong capital appreciation resulting in an active stock selection approach along with a smoother trajectory than the broader market. Figure 2 shows that GMVA has achieved outperformance in both down markets such 211, and in strong up-markets such as 212 and 213. In 29, when high beta stocks that were not favored by our process led the market, the strategy was challenged. Smoother Returns for Investors Figure 3 show that GMVA has generated a smoother trajectory than the index as indicated by the rolling 36-month standard deviation comparison. Lower volatility returns have the possibility of being achieved for investors using these two approaches: Implementing a stock selection process that seeks high quality business models that exhibit less risk. Utilizing a portfolio construction process that focuses on return potential and risk management. Complements Your Equity Portfolio GMVA is constructed without reference to a benchmark and as a result, the stock and sector positions are differentiated. This makes the strategy a natural diversifier to a portfolio that includes benchmark aware equity strategies or a portfolio of passive cap-weighted equity indices. Potential Applications As a long-only, benchmark unaware equity strategy that focuses on delivering strong returns while managing total risk, GMVA is suitable to serve as a core position in a broader equity mandate. Given its risk return profile, GMVA may enable clients to use their risk budget more efficiently, perhaps allocating to higher return or alternative strategies. Simultaneously focusing on generating excess returns while minimizing total volatility, can lead to an improvement in return/risk efficiency. As of ember 31, 215, the Sharpe ratio was 1.14 and highlights this efficiency. This efficiency can also be seen visually in the scatter graph in Figure 4, which details the three-year excess return vs. three-year standard deviation of the managers in the global all cap equity universe from evestment. GMVA has generated positive excess return with a lower risk profile than the benchmark since inception. What s more, the strategy s return/risk profile is also stronger than that of other active managers that are more similar to the benchmark. Clients investing in GMVA could not only benefit from this improvement in return/risk profile, but also achieve some level of diversification (less overlap and redundancy in holdings) from other managers. State Street Global Advisors 2

3 Figure 4: 3-Year Risk and Return Comparison 3-Year Excess Return Year Standard Deviation GMVA Net MSCI World Index MSCI Min Vol Index Source: SSGA, FactSet, as of March 31, 216. The calculation method for value added returns may show rounding differences. Past performance is not a guarantee of future results. The performance figures contained herein are provided on a net of fees basis and reflect the deduction of advisory or other fees which could reduce the return. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in US dollars. Assuming the GMVA portfolio of stocks is different from this pack, could mean less overlap and redundancy in holdings. These potential benefits mean clients could use GMVA as a core equity portfolio allowing them to allocate to higher return seeking or alternative strategies. In addition, the strategy could be used as an alternative to a pure low volatility advanced beta portfolio for a client that is seeking low volatility exposure. The inclusion of the active stock selection approach gives GMVA the ability to seek excess returns above the benchmark. This can be especially important in strong up-markets when pure low volatility strategies may be vulnerable. What s more, in our opinion this approach imparts more balance, as GMVA can have more exposure to growth than a pure low volatility portfolio. However, the inclusion of stock selection approach does not impact the integrity of the low volatility profile. For example, GMVA has a very similar ex ante risk profile to the MSCI Minimum Volatility Index, 13.1 vs 13.4 as of ember 31, In our view, that is a small cost to pay, in terms of an increase in expected risk, for what we believe to be a more balanced approach. SSGA: Invest with a Global Leader SSGA is a global leader in asset management. Sophisticated investors worldwide rely on SSGA for their investment needs. For more than three decades SSGA has contributed experience, depth of resources, strength, and dedication toward a singular goal: to achieve our clients goals. SSGA s global presence and focus on research allows us to invest effectively in markets around the world, while working to meet the objectives set by each and every client. Our scale and experience afford us greater access to financial markets around the world. For clients, this translates to client-centered solutions that are focused on maximizing risk-adjusted returns and providing consistent investment results. The strategy is managed by members of SSGA s Active Quantitative Equities Team, a team exceeding 4 investment professionals managing a range of strategies valued at over $25bn. Our global investment philosophy and process are founded on practices refined over 3-years, leveraging the extensive investment, research and trading resources of SSGA located in the Boston, London, Paris and Sydney. 1 From Axioma s worldwide medium term fundamental risk model. State Street Global Advisors 3

4 Definitions Alpha The excess returns of a fund relative to the return of a benchmark index. Beta Measures the volatility of a security or portfolio in relation to the market, usually as measured by the S&P 5 Index. A beta of 1 indicates the security will move with the market. A beta of 1.3 means the security is expected to be 3 percent more than the market, while a beta of.8 means the security is expected to be 2 percent less volatile than the market. Cap-Weighted Benchmark Stock market index in which the constituents are weighted by total market value. Ex-Ante Risk Anticipated risk (as measured by standard deviation). Long Only Equity Strategy A strategy that only holds long equity positions. Sharpe Ratio The ratio represents the average return earned in excess of the risk free rate per level of volatility. It is used as a measure of risk adjusted returns. Standard Deviation Quantifies how much a series of numbers vary around the mean. A higher standard deviation would indicate more fluctuation. ssga.com For public use. State Street Global Advisors Worldwide Entities Australia: State Street Global Advisors, Australia, Limited (ABN ) is the holder of an Australian Financial Services Licence (AFSL Number ). Registered Office: Level 17, 42 George Street, Sydney, NSW 2, Australia. T: F: Belgium: State Street Global Advisors Belgium, Chausse de La Hulpe 12, 1 Brussels, Belgium. T: , F: SSGA Belgium is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Canada: State Street Global Advisors, Ltd., 77 Sherbrooke Street West, Suite 12 Montreal, Quebec, H3A 1G1, T: and 3 Adelaide Street East Suite 5, Toronto, Ontario M5C 3G6. 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Registered Number: Member of the Irish Association of Investment Managers. T: +353 () F: +353 () Italy: State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA ), with a capital of GBP , and whose registered office is at 2 Churchill Place, London E14 5HJ. State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number R.E.A and VAT number and whose office is at Via dei Bossi, Milano, Italy. T: F: Japan: State Street Global Advisors (Japan) Co., Ltd., Japan, Toranomon Hills Mori Tower 25F, Toranomon, Minato-ku, Tokyo, T: +81 () Financial Instruments Business Operator, Kanto Local Financial Bureau (Kinsho #345) Membership: Japan Investment Advisers Association, The Investment Trust Association, Japan, Japan Securities Dealers Association. Netherlands: State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 166 JR Amsterdam, Netherlands. T: +31 () State Street Global Advisors Netherlands is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-1 Capital Tower, Singapore (Company Reg. No: 22719D, regulated by the Monetary Authority of Singapore) T: F: T: F: Switzerland: State Street Global Advisors AG, Beethovenstrasse. 19, Postfach, CH-827 Zurich. T: +41 () F: +41 () United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered Number: VAT Number: Registered Office: 2 Churchill Place, Canary Wharf, London, E14 5HJ. T: F: United States: State Street Global Advisors, One Lincoln Street, Boston, MA T: Institutional Investor 216 U.S. Investment Management Awards Important Information: A short-list of top performing managers in each of the following strategies are identified by Institutional Investor magazine s editorial and research teams in consultation with evestment s* research team. We analyze investment strategies based on factors such as one-, three- and 5-year performance, Sharpe ratio, information ratio, standard deviation and upside market capture. Each category is analyzed based on the factors used by institutional investors in their own searches on evestment. More than 1 leading U.S. pension plans, foundations, endowments and other institutional investors are surveyed and asked to vote for up to three of the top performing managers in each strategy in which they invested during the past year. Institutional Investor s editorial team analyzes the results of the survey to determine the investment manager winners. For more information, please visit: usinvestmentawards.com/winners.php State Street Global Advisors 4

5 Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. Investments in mid-sized companies may involve greater risks than in those of larger, better known companies, but may be less volatile than investments in smaller companies. Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations. Diversification does not ensure a profit or guarantee against loss. Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries. Although subject to the risks of common stocks, low volatility stocks are seen as having a lower risk profile than the overall markets. However, a portfolio comprised of low volatility stocks may not produce investment exposure that has lower variability to changes in such stocks price levels. This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy s Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks. Past performance is not a guarantee of future results. Portfolio characteristics are calculated using the month end market value of holdings except, if shown, for beta and standard deviation which use month end return values. Averages reflect the market weight of securities in the portfolio. Market data, prices, and dividend estimates for characteristics calculations provided by FactSet Research Systems, Inc. All other portfolio data provided by SSGA. Characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. Actively managed Strategy do not seek to replicate the performance of a specified index. The Strategy is actively managed and may underperform its benchmarks. An investment in the strategy is not appropriate for all investors and is not intended to be a complete investment program. Investing in the strategy involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment. Source: MSCI. The MSCI data is comprised of a custom index calculated by MSCI for, and as requested by, SSGA. The MSCI data is for internal use only and may not be redistributed or used in connection with creating or offering any securities, financial products or indices. Neither MSCI nor any other third party involved in or related to compiling, computing or creating the MSCI data (the MSCI Parties) makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and the MSCI Parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to such data. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages and Standard & Poor s, a division of The McGraw-Hill Companies, Inc. ( S&P ) and is licensed for use by State Street. State Street Global Advisors 216 State Street Corporation. All Rights Reserved. ID6645-INST Exp. Date: 8/31/216