As one of the longest market recoveries in history marches on, it may be difficult for many investors to remember the emotional turmoil they felt during the global financial crisis over 10 years ago. Some may even find they have become complacent about risk. This is why now may be a critical time to focus on adapting portfolios to a changing economic landscape – to ensure opportunities are appropriately matched to current risk factors.

The team at Seeyond, quantitative managers that take a risk-based approach to investing, continue to see risk as asymmetrically skewed this late in the economic cycle. As we head into 2020, Seeyond’s view is that there is a move away from synchronized global growth and a deceleration in global economies. As such, it is more important than ever for investors to be prepared to expect the unexpected.

Chief Market Strategist at Natixis Investment Managers, David Lafferty, CFA®, believes there are several factors causing today’s slow real growth, and he doesn’t see a pickup anytime soon. “For structural reasons related to the global working age population, labor force participation, and productivity, it’s difficult to envision a sustained and meaningful pickup in potential real growth rates in most of the developed world,” said Lafferty. Corporate earnings expectations, trade policy setbacks, and geopolitical tensions could also cause more uncertainty for global markets.

Uncertainty Signposts
Various economic indicators appear to be signaling growing angst among consumers and businesses, as well. Business confidence, as measured by the OECD Business Confidence Index,1 peaked in late 2017 and has been steadily declining ever since to levels not seen since the 2008–2009 financial crisis. Consumer confidence also peaked for both widely used indicators, the University of Michigan Surveys of Consumers2 and the OECD Consumer Confidence Index, which has declined to 2014 levels. Consumers in particular may be wary of what the future holds and are growing cautious about expectations going forward. This is concerning as consumer spending is arguably the essence of economic growth, accounting for nearly 70% of GDP. Finally, the Economic Policy Uncertainty Index for United States published by FRED, Federal Reserve Bank of St. Louis, has steadily increased in 2019.

Investors Want Calming Strategies
Knowing that uncertainty can create heightened anxiety in the marketplace, investors may need to refrain from making emotionally driven investment decisions. This behavior can adversely impact their long-term financial plans. In fact, in the 2019 Natixis Investment Managers Global Survey of Individual Investors,3 six in ten investors said they feel that volatility undermines their ability to achieve savings and investment goals. As a result, many are looking for investments that can help mitigate the risks associated with equity investing – along with their anxieties, according to David Goodsell, Executive Director of Natixis’ Center for Investor Insight.

“Nine out of ten investors told us it is important to protect their assets in volatile times. That feeling is so strong that, in an era in which fees on some passive investments have dropped to nearly zero, 56% of investors are willing to pay a premium price for an investment that could help protect them from volatility,” said Goodsell. Therefore, complementing portfolios with strategies specifically designed to help investors become less dependent on day-to-day gyrations in equity markets may be a smart move.

An Alternative to Alternatives
In boxing, the phrase “roll with the punches” is a reminder that fighters are in the business of getting punched as much as punching. As such, boxers who develop a greater capacity to take the pounding are well on their way to victory. This may ring a bell in terms of investors staying the course through bouts of market uncertainty and volatility. However, the problem is that investment options are quite limited when it comes to equity strategies that seek to help investors stay invested over time to achieve long-term goals.

Many strategies designed to help mitigate the effect of downside risk typically take a drastic approach to equity exposure by either removing upside potential altogether or capping potential upside. This can make them impractical in an environment of uncertainty. Also, many of those strategies tend to be in the liquid-alternative category and feature the use of leverage, shorting and derivatives – which can be restricted or make investors uneasy.

One interesting solution is to put the power of equity factors to use as a tool in mitigating uncertainty. In particular, the minimum volatility factor has the potential to yield an attractive investment outcome when market uncertainty is high.

Minimum Volatility Versatility
Minimum volatility can be an effective risk management tool to help portfolios remain invested through uncertain times. They can be used as a core allocation, which may increase visibility on return dispersion when compared to traditional equity investments, and achieve a more efficient use of capital. Or they can act as a tool to help free up a portfolio’s risk budget on a more tactical basis.

Minimum volatility is the only factor that seeks a dual investment objective of volatility mitigation with capital appreciation. At Seeyond, the team closely follows this factor. Seeyond strategies based on minimum volatility seek to achieve equity-like returns with significantly lower volatility than equity markets. The team believes this approach can help investors stay invested through all market conditions. Unlike many liquid-alternative strategies, minimum volatility can achieve exposure to equity market segments with materially lower volatility than experienced by those markets in a long-only equity strategy.

Minimum volatility strategies, such as those managed by Seeyond for the past 10 years, may offer sensitivity to investment markets as measured by beta on par with liquid alternatives. They also retain alpha generation potential through exposure to equities. It is that relationship between a low beta and healthy alpha generation that seeks to generate an asymmetric return outcome helping to mitigate downside movements while retaining competitiveness on the upside.

Let’s return once again to the boxing analogy. In the equity space, most mutual funds can be categorized as either benchmark huggers or very aggressive fighters – fast hitters who run the risk of being easily pushed into the ropes or knocked down when markets hit back. By contrast, Seeyond’s approach to minimum volatility is meant to be steadier punchers with the potential to parry the jabs and uppercuts of market turbulence. This type of minimum volatility strategy may offer the potential to absorb some market shocks, with a lower beta, and maintain lower volatility over time. What’s more, the strategy also seeks to deliver returns in excess of the equity risk taken and outperform the broader market over the long term. In short, it seeks to take the hits of the market while it keeps fighting for returns.

Minimize, Not Compromise
It is important to reconcile minimum volatility strategies with investment approaches developed around the concept of “greater risk” leading to “greater reward.” Our experience talking to financial professionals and investors has led us to believe that the best way to overcome this deep-rooted behavioral and cognitive bias may be to think in terms of outcome – i.e. investment goals and applications.

Also, as the chart below illustrates, the idea that you need to take greater risk to yield greater return does not always hold for equities. In fact, for the 20-year period of 1996 to 2016, investing in lower-risk equities offered better risk-adjusted returns than higher-risk stocks.4

WEBART65 0619 Emotional Investing Insights Article Chart F 1

Because there is no silver bullet in the investment universe, one may expect to see minimum volatility strategies display a countercyclical pattern in their performance profile. In other words, rather than mirroring the market’s highs and lows, minimum volatility strategies seek long-term outperformance with a steadier return profile.

Helping Investors Help Themselves
Overall, a long-running bull market, along with signs of a global economic slowdown, has the potential to make markets more volatile in 2020. Because of this, investors may want to consider how a minimum volatility strategy may fortify portfolios – so they can better roll with the punches and stay invested to pursue long-term financial goals.
1 The OECD Business Confidence Index provides information on future developments, based upon opinion surveys on developments in production, orders and stocks of finished goods in the industry sector.

2 University of Michigan: Consumer Sentiment; retrieved from FRED, Federal Reserve Bank of St. Louis https://fred.stlouisfed.org/series/UMCSENT

3 Source: Natixis Investment Managers 2019 Global Survey of Individual Investors, conducted by CoreData Research, February-March 2019. Survey included 9,100 investors in 25 countries.

4 Source: Bloomberg/Seeyond. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. Risk is measured by standard deviation. Q1 (lowest quintile) represents low risk stocks based on volatility. Q5 (highest quintile) represents high risk stocks based on volatility. Based on returns of stocks included in the MSCI All Country World Index (Net). The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. Stocks are equal weighted and quintiles are rebalanced on a quarterly basis.

CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the ETF’s net asset value. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs. Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund’s investments to decline.

Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and adherence to environmental, social and governance (ESG) practices, therefore the Fund’s universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.

All investing involves risk, including the risk of loss.

Diversification does not eliminate the risk of experiencing investment losses.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Before investing, consider the fund's investment objectives, risk, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.

ALPS Distributors, Inc. is the distributor for the Natixis Seeyond International Minimum Volatility ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.

Seeyond is a subsidiary of Ostrum Asset Management. Operated in the US through Ostrum Asset Management U.S., LLC. Ostrum Asset Management U.S., LLC. and Natixis Distribution, L.P. are indirect subsidiaries of Natixis Investment Managers.

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