2013 The Q1 2013 Managed Volatility Performance Paradox
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The global managed volatility strategy aims to maintain a low volatility equity portfolio while outperforming the MSCI World Index, achieving a 16.31% return compared to the benchmark's 11.35%. The outperformance is primarily attributed to strategic sector allocations favoring less volatile sectors during a quarter when cyclical sectors underperformed. Overall, while the strategy exhibits characteristics of low volatility, the source of its overperformance should be analyzed carefully as the current cost of being underexposed to volatility has increased.
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SSgA CAPITAL INSIGHTS | Q1 2013 MANAGED VOLATILITY
The largest factor difference by far is the volatility exposure.
Here the managed volatility strategy is underexposed at
-0.54 versus -0.11 for the benchmark.
To understand the current outperformance—outperformance
obtained while the strategy is in line with our expectations in
terms of risk profile—we ran a performance attribution analysis
by sector. In fact the main driver of the overperformance over
the quarter is mostly the difference in sector distribution
(detailed in Figure 3).
Logically, the managed volatility strategy is actively concentrated
in the less volatile sectors such as Consumer Staples and
Utilities and is actively underweighted in the most volatile
sectors such as Financials and Energy.
It appears that the sector dynamics during the quarter resulted
in a flight to quality and to underexposure to volatility at a time
when the most volatile sectors—such as Materials and Energy
and Technology—have significantly underperformed and
the less volatile sectors—such as Healthcare and Consumer
Staples—have overperformed.
Figure 4: Evolution of the Managed Volatility Strategy’s
Value Factor
— Value
Dec
2007
20092008 2010 2011 2012 Mar
2013
Factor Exposure Level
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
Source: Factset. April 2013
Figure 2: Portfolio Risk Factor Exposure of Global Managed
Volatility Strategy vs. MSCI World
Data Data Difference
Exchange Rate Sensitivity 0.07 -0.04 0.11
Growth -0.18 -0.03 -0.15
Leverage 0.32 -0.01 0.33
Liquidity -0.12 0.20 -0.32
Medium-Term Momentum 0.03 0.02 0.01
Short-Term Momentum 0.14 0.04 0.10
Size -0.04 0.24 -0.28
Value -0.31 -0.03 -0.28
Volatility -0.54 -0.11 -0.42
Source: Factset. April 2013
Figure 3: Performance Attribution
SSgA Global Managed Volatility MSCI World Variation Attribution Analysis
GICS_SECTOR
Port.
Average
Weight
Port.
Total
Return
Port.
Contrib.
To
Return
Bench.
Average
Weight
Bench.
Total
Return
Bench.
Contrib.
To
Return
Average
Weight
Difference
Total
Return
Difference
Contrib.
To Return
Difference
Allocation
Effect
Selection
+
Interaction
Total
Effect
Consumer Discretionary 6.86 17.79 1.22 11.26 14.41 1.60 -4.39 3.37 -0.38 -0.11 0.22 0.12
Consumer Staples 24.39 17.73 4.32 10.82 16.44 1.73 13.57 1.28 2.59 0.69 0.31 1.00
Energy 0.01 6.13 0.00 10.09 5.89 0.63 -10.08 0.24 -0.63 0.54 0.02 0.56
Financials 8.77 12.32 1.09 20.58 13.64 2.77 -11.81 -1.32 -1.68 -0.24 -0.12 -0.36
Health Care 18.77 17.90 3.37 10.85 19.10 2.00 7.92 -1.20 1.38 0.61 -0.18 0.44
Industrials 1.71 3.00 0.06 10.95 9.72 1.07 -9.25 -6.72 -1.02 0.15 -0.12 0.04
Information Technology 1.69 11.51 0.20 11.63 6.60 0.78 -9.95 4.91 -0.58 0.49 0.10 0.60
Materials 0.34 15.22 0.05 6.38 -4.10 -0.27 -6.05 19.32 0.32 0.98 0.08 1.07
Telecommunication Services 11.58 15.97 1.86 3.77 15.46 0.57 7.81 0.50 1.29 0.34 0.08 0.41
Utilities 24.86 16.72 4.12 3.41 14.16 0.48 21.44 2.56 3.64 0.48 0.66 1.14
[Cash] 0.39 -0.44 -0.01 -- -- -- 0.39 -0.44 -0.01 -0.04 -- -0.04
[Unassigned] 0.63 0.95 0.02 0.24 -12.21 -0.02 0.38 13.16 0.04 0.01 -0.02 -0.01
Total 100.00 16.31 16.31 100.00 11.35 11.35 -- 4.96 4.96 3.92 1.04 4.96
Source: Factset. April 2013
Past performance is not a guarantee of future results.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
Sectors shown are as of the date indicated and are subject to change.](https://image.slidesharecdn.com/2013jamettheq12013managedvolatilityperformanceparadox-151205094439-lva1-app6892/85/2013-The-Q1-2013-Managed-Volatility-Performance-Paradox-2-320.jpg)
2013 The Q1 2013 Managed Volatility Performance Paradox
- 1. Part of State Street’s Vision thought leadership series SSgA CAPITAL INSIGHTS VIEWPOINTS PHOTO by Frederic Jamet Head of Investments SSgA France The Q1 2013 Managed Volatility Performance Paradox What is the Paradox? The Global Managed Volatility strategy aims to create a 100% equity portfolio with minimum volatility within the MSCI World universe. This strategy uses quadratic optimization in order to produce the minimum ex ante volatility with the minimum set of other constraints. One major feature of the strategy is the low beta. This is a direct consequence of the minimum volatility tilt. The typical ex ante beta of the strategy is 0.6, which means that, according to the CAPM theory, the excess return of the strategy should be equal to 0.6 times the excess return of the market, i.e. the MSCI World index. As such, the strategy is intended to offer some downside protection in exchange for limited participation in market rises. However, from 31 December 2012 to 30 April 2013 the performance of the Global Managed Volatility strategy has been +16.31% versus +11.35% from MSCI World, outperforming the benchmark by +4.96%. Is there a paradox that the managed volatility strategy has outperformed the benchmark when the benchmark performance has been so high over the period, and when the beta of the strategy is supposed to be much lower than the beta of the benchmark? We investigated further. Where does the Managed Volatility Paradox Come From? It appears that the current characteristics of the managed volatility strategy (as described in Figure 1) are in line with the general description of the strategy, notably a low absolute risk, a low predicted beta (less than 0.7) and a high tracking error (more than 5%). The absolute risk is much lower and this is the first objective of the strategy. The beta is significantly lower at 0.65 and this contributes to the high predicted tracking error of 6.0%. The factor exposure supports this analysis. Figure 1: Risk Characteristics of Global Managed Volatility Strategy vs. MSCI World Risk Characteristics SSgA Global Managed Volatility MSCI World Predicted Tracking Error 6.00 -- Absolute Risk 9.57 13.82 Predicted Beta 0.65 1.00 R-squared 0.87 1.00 Percent Stock Specific Risk 5.63 #N/A Percent Factor Risk 94.37 #N/A Source: Factset. April 2013
- 2. 2 SSgA CAPITAL INSIGHTS | Q1 2013 MANAGED VOLATILITY The largest factor difference by far is the volatility exposure. Here the managed volatility strategy is underexposed at -0.54 versus -0.11 for the benchmark. To understand the current outperformance—outperformance obtained while the strategy is in line with our expectations in terms of risk profile—we ran a performance attribution analysis by sector. In fact the main driver of the overperformance over the quarter is mostly the difference in sector distribution (detailed in Figure 3). Logically, the managed volatility strategy is actively concentrated in the less volatile sectors such as Consumer Staples and Utilities and is actively underweighted in the most volatile sectors such as Financials and Energy. It appears that the sector dynamics during the quarter resulted in a flight to quality and to underexposure to volatility at a time when the most volatile sectors—such as Materials and Energy and Technology—have significantly underperformed and the less volatile sectors—such as Healthcare and Consumer Staples—have overperformed. Figure 4: Evolution of the Managed Volatility Strategy’s Value Factor — Value Dec 2007 20092008 2010 2011 2012 Mar 2013 Factor Exposure Level -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Source: Factset. April 2013 Figure 2: Portfolio Risk Factor Exposure of Global Managed Volatility Strategy vs. MSCI World Data Data Difference Exchange Rate Sensitivity 0.07 -0.04 0.11 Growth -0.18 -0.03 -0.15 Leverage 0.32 -0.01 0.33 Liquidity -0.12 0.20 -0.32 Medium-Term Momentum 0.03 0.02 0.01 Short-Term Momentum 0.14 0.04 0.10 Size -0.04 0.24 -0.28 Value -0.31 -0.03 -0.28 Volatility -0.54 -0.11 -0.42 Source: Factset. April 2013 Figure 3: Performance Attribution SSgA Global Managed Volatility MSCI World Variation Attribution Analysis GICS_SECTOR Port. Average Weight Port. Total Return Port. Contrib. To Return Bench. Average Weight Bench. Total Return Bench. Contrib. To Return Average Weight Difference Total Return Difference Contrib. To Return Difference Allocation Effect Selection + Interaction Total Effect Consumer Discretionary 6.86 17.79 1.22 11.26 14.41 1.60 -4.39 3.37 -0.38 -0.11 0.22 0.12 Consumer Staples 24.39 17.73 4.32 10.82 16.44 1.73 13.57 1.28 2.59 0.69 0.31 1.00 Energy 0.01 6.13 0.00 10.09 5.89 0.63 -10.08 0.24 -0.63 0.54 0.02 0.56 Financials 8.77 12.32 1.09 20.58 13.64 2.77 -11.81 -1.32 -1.68 -0.24 -0.12 -0.36 Health Care 18.77 17.90 3.37 10.85 19.10 2.00 7.92 -1.20 1.38 0.61 -0.18 0.44 Industrials 1.71 3.00 0.06 10.95 9.72 1.07 -9.25 -6.72 -1.02 0.15 -0.12 0.04 Information Technology 1.69 11.51 0.20 11.63 6.60 0.78 -9.95 4.91 -0.58 0.49 0.10 0.60 Materials 0.34 15.22 0.05 6.38 -4.10 -0.27 -6.05 19.32 0.32 0.98 0.08 1.07 Telecommunication Services 11.58 15.97 1.86 3.77 15.46 0.57 7.81 0.50 1.29 0.34 0.08 0.41 Utilities 24.86 16.72 4.12 3.41 14.16 0.48 21.44 2.56 3.64 0.48 0.66 1.14 [Cash] 0.39 -0.44 -0.01 -- -- -- 0.39 -0.44 -0.01 -0.04 -- -0.04 [Unassigned] 0.63 0.95 0.02 0.24 -12.21 -0.02 0.38 13.16 0.04 0.01 -0.02 -0.01 Total 100.00 16.31 16.31 100.00 11.35 11.35 -- 4.96 4.96 3.92 1.04 4.96 Source: Factset. April 2013 Past performance is not a guarantee of future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. Sectors shown are as of the date indicated and are subject to change.
- 3. 3© 2013 State Street Corporation. All Rights Reserved. ID2712-EUMKT-2921 0513 Exp. Date: 31/05/13 SSgA CAPITAL INSIGHTS | Q1 2013 MANAGED VOLATILITY SSgA Global Entities Australia: State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia Telephone: +612 9240-7600 • Facsimile: +612 9240-7611. Belgium: State Street Global Advisors Belgium, Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: 32 2 663 2036 • Facsimile: 32 2 672 2077. Belgium is a branch of State Street Global Advisors Limited. Canada: State Street Global Advisors, Ltd., 770 Sherbrooke Street West Suite 1200, Montreal, Quebec H3A 1G1 Canada and 30 Adelaide Street East, Suite 500, Toronto, Ontario, M5C 3G6 Canada. Dubai: State Street Bank and Trust Company (Representative Office), Suite 404 4th Floor, Building 4, Emaar Square, Dubai, United Arab Emirates. Telephone: +971 (0)4-4372800 • Facsimile: +971 (0)4-4372818. France: State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number 412 052 680. Registered office: Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. Telephone: (+33) 1 44 45 40 00 • Facsimile: (+33) 1 44 45 41 92. Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Telephone +49 (0)89-55878-400 • Facsimile +49 (0)89-55878-440. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong • Telephone: +852 2103-0288 • Facsimile: +852 2103-0200. Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers. Italy: State Street Global Advisors Ltd., Sede Secondaria di Milano - Via dei Bossi, 4 20121 Milan, Italy. Telephone: +39 02 32066 100 • Facsimile: +39 02 32066 155. Japan: State Street Global Advisors, Japan, 9-7-1 Akasaka, Minato-ku, Tokyo Telephone +813 4530 7380. Financial Instruments Business Operator, Kanto Local Financial Bureau (Kinsho #345). Japan Securities Investment Advisers Association, Investment Trust Association, Japan Securities Dealers’ Association. Netherlands: State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam, Netherlands. Telephone: 31 20 7085600 • Facsimile 31 20 7085601, SSgA Netherlands is a branch of State Street Global Advisors Limited. Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D), Telephone: +65 6826-7500 • Facsimile: +65 6826-7501. Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Telephone +41 (0)44 245 70 00 • Facsimile +41 (0)44 245 70 16. United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000 • Facsimile: 020 3395 6350. United States: State Street Global Advisors, One Lincoln Street, Boston, MA 02111-2900. Web: www.ssga.com The views expressed in this material are the views of Frederic Jamet through the period ended April 30, 2013 and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal. 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. SSgA generally delegates commodities management for separately managed accounts to SSgA FM, a wholly owned subsidiary of State Street and an affiliate of SSgA. SSgA FM is registered as a commodity trading advisor (“CTA”) with the Commodity Futures Trading Commission and National Futures Association. This communication is not specifically directed to investors of separately managed accounts (SMA) utilizing futures, options on futures or swaps. SSgAFM CTAclients should contact SSgA Relationship Management for important CTA materials. 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. A large part of the 4.96% overperformance, 3.92%, comes from the sector allocation and only a residual part, 1.04%, comes from the selection effect. Thus, this overperformance would have been replicated by any active sector funds that took this defensive allocation during the quarter, irrespective of a low volatility stock picking requirement. Finally, the historical evolution of the Managed Volatility Strategy’s value and momentum factors, since 2007, is shown on Figure 4. From 2009 to 2011 the exposure to value was positive. This can be interpreted as indicating that the Managed Volatility Strategy was inexpensive relative to the value factor. The exposure to value became negative in 2012 and 2013. This could be interpreted as indicating that the Managed Volatility Strategy is now expensive relative to the value factor. Conclusion The managed volatility strategy shows all the characteristics of a low volatility strategy from an ex ante volatility (lower than the volatility of the market), beta (lower than the one of the market) and factor exposures (largely underexposed to volatility factor) perspective. The first quarter overperformance comes largely from the sector allocation. It seems that the defensive sectors have largely overperformed the cyclical sectors during the quarter. It appears that a low beta strategy such as the managed volatility strategy can significantly outperform the benchmark even when the market is rising. Investors should bear in mind not only the expected return of the strategy that is associated with the beta, but also the absolute risk (low) and relative risk (high) vis-a-vis the benchmark. On the other hand, however, investors should be aware of the source of this overperformance and should realise that being underexposed to volatility is now becoming more expensive (in the sense of the value factor) than it was before.