Managing Volatility Risk in Today’s Markets
Alex Piré, Head of Client Portfolio Management for 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
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
Reading the reviews
Based on this data, we can draw two conclusions:
- 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.
- 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.
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.
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.
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.