Ever since Harry Markowitz published the origins of Modern Portfolio Theory in the Journal of Finance in 1952, “higher risk leads to higher return” has become a commonplace adage in investing. As a result, many investors embark on higher-risk ventures in search of higher returns. Conversely, many investors also believe low-risk positions generally lead to low returns. This “no pain, no gain” way of thinking is deep-rooted in how we evaluate potential opportunities and make investment decisions.

Checking the Record
Many equity investors have been led to believe that taking on a relatively higher level of risk is necessary to achieve higher returns. The problem is that the historical record of equity market returns offers very little support for this claim. In fact, a range of studies have found that many low volatility stocks have consistently outperformed high volatility stocks – in both US and international markets – as far back as 1926.1 Seeyond’s2 research team has looked at market data for global equities between 1995 and 2016 and reached a similar conclusion. As the graph below shows, low-risk global equities (as measured by volatility) outperformed higher-risk global equities market cycle after market cycle over this time period.3

Annual Return & Risk for Global Equities by Risk Quintiles

Perception vs. Reality
We've all heard the adage “perception is reality.” In this case, the perception that low risk leads to low returns is likely to remain a reality for many investors. However, at Seeyond, we believe that disconnecting perception from reality has the potential to result in opportunities for investors. Our Natixis Seeyond International Minimum Volatlity ETF4 (MVIN) seeks to actively extract the most return available from what we believe is a structural disconnect between perception and reality in the equity market. Hence the ETF’s dual goal: outperform the international equity market with significantly lower volatility.

Coping with Volatility
Less than four in ten (38%) of US advisors believe that investors understand the risks of the current market environment.5 Investors looking to cope with potential market volatility might want to start by strategizing for volatility risk where it matters most. At Seeyond, we believe that the positive relationship between risk and expected returns may hold true when allocating between different asset classes, but may be less valid when investing within a particular asset class such as equities. Our International Minimum Volatility ETF strives to help investors get the most out of the volatility risk they decide to take on within their portfolio.

 


1 Baker, Nardin L. and Robert A. Haugen. “Low Risk Stocks Outperform within All Observable Markets of the World.” Lowvolatilitystocks.com. Web. April 2018. www.lowvolatilitystocks.com/bob-haugen-index2/low-risk-stocks-article

2 Seeyond is an affiliate of Natixis Investment Managers dedicated to Active Quantitative strategies.

3 Seeyond’s study consists of classifying stocks across various broad based indexes by risk (as measured by standard deviation) into risk quintiles and comparing the returns of Quintile 1 (lowest quintile: represents low risk stocks based on volatility) with the returns of Quintile 5 (highest quintile: represents high risk stocks based on volatility) over various periods. Figure 1 is provided for illustrative purposes of Seeyond research and represents returns of stocks included in the MSCI All Country World Index (Net). Stocks are equal weighted and quintiles are rebalanced on a quarterly basis. Source: Bloomberg / Seeyond.

4 An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold. Seeyond sub-advises the Natixis Seeyond Minimum Volatility ETF - MVIN.

5 Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.

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.

RISKS: Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETFs, unlike typical exchange-traded funds, do not attempt to track or replicate an index. 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. 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 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.

The Fund seeks long-term capital appreciation with less volatility than typically experienced by international equity markets.

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 ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.

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