Managing Volatility Risk in Today’s Markets

Alex Piré of Seeyond discusses strategies investors can consider for managing market turbulence after a long period of low volatility.


  • Volatility can be unpredictable – but after seven years of a low volatility environment, investors may have been lulled into a false sense of security.
  • Global economies are continuing to grow, but geopolitical risks like the US-China trade war and Brexit remain
  • Investors may want to consider strategies that have the potential to provide downside mitigation while taking advantage of any new market gains in the near-term
You may be familiar with the old market adage “Sell in May and go away.” The saying is a reference to historical underperformance of equity markets during the months of May through October. Episodes of market volatility in 2019 – and the potential for volatility in the near term – may cause some investors to consider this suggestion to be good advice. But getting out of the market can have its own costs. This prompts the question: How can investors manage volatility risk while remaining positioned to take advantage of market movements when they occur?

Vacation time: By the numbers
On average, over the past 20 years international markets as measured by the MSCI EAFE Index1 underperformed by over 6% during the period from May to October relative to the period from November to April, returning -0.32% vs. 5.93%. Looking at Chart 1, we can see that investors who sold and stayed away avoided losing an average 20% from May to October in 5 of the past 20 years: 2001, 2002, 2008, 2011 and 2018. On the other hand, investors that were not fully invested in 2003, 2009 and 2017 missed out on an average 22% return.

CHART 1: ROLLING INTERNATIONAL MARKET RETURNS: MAY-OCT VS. NOV-APR
WEBART59 0519 May 2019 MVIN Chart 1 F
Source: Morningstar

Reading the reviews
Based on this data, we can draw two conclusions:

  1. In terms of long-term returns on a before-tax basis, investors who remained invested consistently over the past 20 years would have benefited only slightly from selling in May and returning in November.
  2. Investors that did not consistently follow this adage may have significantly underperformed if they missed out on the high return years of 2003, 2009 and 2017.
It is important to put these conclusions in the broader context of the reality experienced by investors. For taxable accounts, embedded capital gains may be prohibitive to repeatedly selling and buying assets annually. Secondly, transaction costs may erode the ultimate benefit of a “sell in May” approach.

Advice for travelers
At Seeyond, we would argue that the emotional costs of the more extreme return deviations often experienced from May to November – on both the upside and the downside – could potentially outweigh the cost of capital gains taxes and transaction fees for many investors. However, a better solution may be to utilize an asset allocation strategy that incorporates tools to help attenuate volatility while remaining fully invested. This approach would also avoid the need for constant and expensive portfolio churn.

Diversification may be one such solution, as it can help to ballast the portfolio and bring in less correlated sources of return, which can help in periods of heightened volatility. Seeking to pinpoint attractive diversifiers can serve as a way to enhance accounting for correlations alone. The Natixis Seeyond International Minimum Volatility ETF (MVIN) seeks to deliver a dual investment outcome – yielding attractive returns with the potential to beat index performance over full market cycles while working to significantly reduce volatility and drawdowns. One such diversifier may be Minimum Volatility, which seeks to deliver market-like returns over the long term but with less volatility than experienced by the market. Min Vol strategies can help provide more consistent returns through time while limiting the magnitude of extreme returns that deviate from the norm. Natixis Seeyond International Minimum Volatility ETF (MIVN) is an example of this kind of strategy. It seeks to deliver a dual investment outcome – yielding attractive returns with the potential to beat index performance over full market cycles while working to significantly reduce volatility and drawdowns. 

Active exploration
Minimum volatility investment strategies come in all shapes and sizes, but we believe that a factor as dynamic as volatility needs to be harnessed using the power of active management. MVIN seeks to capture capital appreciation but with less volatility than experienced by equity markets and fundamental managers. Less volatile investments mean a lower risk of emotional decision-making, which can lead investors to make the wrong decision when volatility spikes.
 
In fact, after returning a competitive 90% of the upside of the International Index in 2017 (22.2% vs. 25.0%), MVIN reduced the magnitude of the 2018 market drawdown by over 50% (-6.2% vs. -13.8%). More importantly, 2018 – one of the 5 years where the period from May to October was particularly difficult for investors – saw an International Index drawdown of -10%, which put it in correction territory.
 
Travel safely
Selling in May has the potential to help investors emotionally, but historical data suggests it has little effect on downside risk in international equity markets. What’s more, it can lead to increased costs and tax consequences. Instead, investors may be better off diversifying into minimum volatility strategies, which are designed to help them become less dependent on day-to-day market gyrations in equity markets.
 
 
 
You may be familiar with the old market adage “Sell in May and go away.” The saying is a reference to historical underperformance of equity markets during the months of May through October. Episodes of market volatility in 2019 – and the potential for volatility in the near term – may cause some investors to consider this suggestion to be good advice. But getting out of the market can have its own costs. This prompts the question: How can investors manage volatility risk while remaining positioned to take advantage of market movements when they occur?
 
Vacation time: By the numbers
 
On average, over the past 20 years international markets as measured by the MSCI EAFE Index1 underperformed by over 6% during the period from May to October relative to the period from November to April, returning -0.32% vs. 5.93%. Looking at Chart 1, we can see that investors who sold and stayed away avoided losing an average 20% from May to October in 5 of the past 20 years: 2001, 2002, 2008, 2011 and 2018. On the other hand, investors that were not fully invested in 2003, 2009 and 2017 missed out on an average 22% return.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CHART 1: ROLLING INTERNATIONAL MARKET RETURNS: MAY-OCT VS. NOV-APR
 
 
 
 
Source: Morningstar
 
 
Reading the reviews
 
Based on this data, we can draw two conclusions:
 
1. In terms of long-term returns on a before-tax basis, investors who remained invested consistently over the past 20 years would have benefited only slightly from selling in May and returning in November.
 
2. Investors that did not consistently follow this adage may have significantly underperformed if they missed out on the high return years of 2003, 2009 and 2017.
 
It is important to put these conclusions in the broader context of the reality experienced by investors. For taxable accounts, embedded capital gains may be prohibitive to repeatedly selling and buying assets annually. Secondly, transaction costs may erode the ultimate benefit of a “sell in May” approach.
 
Advice for travelers
 
At Seeyond, we would argue that the emotional costs of the more extreme return deviations often experienced from May to November – on both the upside and the downside – could potentially outweigh the cost of capital gains taxes and transaction fees for many investors. However, a better solution may be to utilize an asset allocation strategy that incorporates tools to help attenuate volatility while remaining fully invested. This approach would also avoid the need for constant and expensive portfolio churn. 
Diversification may be one such solution, as it can help to ballast the portfolio and bring in less correlated sources of return, which can help in periods of heightened volatility. Seeking to pinpoint attractive diversifiers can serve as a way to enhance accounting for correlations alone. The Natixis   Seeyond International Minimum Volatility ETF (MVIN) seeks to deliver a dual investment outcome – yielding attractive returns with the potential to beat index performance over full market cycles while working to significantly reduce volatility and drawdowns.
 
Example itinerary
 
To illustrate the potential benefits of adding MVIN  , we created a portfolio investing half of its assets in the international market (International Index) and the other half in a minimum volatility proxy (Min Vol Index).2 The resulting anecdotal portfolio had interesting returns. Over the past 20 years, the average November to April returns would be the same as what was experienced from the International Index alone. Yet the average return for the May to October period would see a material increase of 0.75% into positive territory. In addition, as shown in Chart 2, returns would be significantly more consistent through time with less extreme values.
 
 
 
 
CHART 2: ROLLING INTERNATIONAL MARKET RETURNS: MAY-OCT VS. NOV-APR
 
 
 
Source: Morningstar. International Index: MSCI EAFE NR USD, International Min Vol Index: MSCI EAFE Min Vol NR USD 
 
Active exploration
 
Minimum volatility investment strategies come in all shapes and sizes, but we believe that a factor as dynamic as volatility needs to be harnessed using the power of active management. MVIN seeks to capture capital appreciation but with less volatility than experienced by equity markets and fundamental managers. Less volatile investments mean a lower risk of emotional decision-making, which can lead investors to make the wrong decision when volatility spikes.
 
In fact, after returning a competitive 90% of the upside of the International Index in 2017 (22.2% vs. 25.0%), MVIN  reduced the magnitude of the 2018 market drawdown by over 50% (-6.2% vs. -13.8%). More importantly, 2018 – one of the 5 years where the period from May to October was particularly difficult for investors – saw an International Index drawdown of -10%, which put it in correction territory.
 
Travel safely
 
Selling in May has the potential to help investors emotionally, but historical data suggests it has little effect on downside risk in international equity markets. What’s more, it can lead to increased costs and tax consequences. Instead, investors may be better off diversifying into minimum volatility strategies, which are designed to help them become less dependent on day-to-day market gyrations in equity markets.
 
1. The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. With 921 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
 
2. The MSCI EAFE Minimum Volatility (USD) Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid-cap equity universe across Developed Markets countries around the world, excluding the US and Canada. The index is calculated by optimizing the MSCI EAFE Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI EAFE Index.
 
 
 
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. With 921 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI EAFE Minimum Volatility (USD) Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid-cap equity universe across Developed Markets countries around the world, excluding the US and Canada. The index is calculated by optimizing the MSCI EAFE Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI EAFE Index.

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.

ESG investing focuses on investments in companies that demonstrate adherence to environmental, social and governance (ESG) practices, therefore the universe of investments may be reduced. An ESG strategy 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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