Despite "risk off" mode - blended approach appears key to unlocking long term benefits

27/10/2014

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Despite "risk off" mode - blended approach appears key to unlocking long term benefits

Jonathan White, Deputy Head of Client Portfolio Management at AXA Rosenberg, the systematic equity arm of AXA IM, comments:

"The extent to which equity markets switched into ‘risk off' mode during the market fall over the last month was observable by the degree to which some low volatility indices, a type of smart beta strategy, outperformed the standard cap weighted indices.

"For example, MSCI Global Minimum Volatility Indices, which are constructed only of companies with the least volatile share prices, outperformed the broader market (defined by the MSCI World Index) by their greatest margin since May 2012. This was when the double header of European sovereign debt concerns and slower US macro data caused market unease. Prior to that, you would have needed to go back to September 2011 – or the depths of the financial crisis – to find periods when the relative performance of minimum volatility indices, was better over a one month horizon1.

"While pure low risk indices are behaving as they should at the moment, i.e. mitigating against downside risk , we would highlight a note of caution. When you take a closer look at performance on the days when the market stabilised and prices rallied, pure low risk indices (such as minimum volatility approaches) exhibited low or very low participation rates, to the extent that on some days these indices registered less than half the market gain1.

"Historically, smart beta approaches that are based on fundamental measures have tended to participate in rising equity markets, more effectively. This has been the case on the ‘up market' days this past week.

"Looking beyond the current turmoil we believe that smart beta investors who want lower risk but also access to the long term return benefits of equities may wish to consider adopting a blended smart beta approach. Avoiding stocks with high price volatility but also taking into account the fundamentals of the underlying company, such as its earnings growth prospects, rather than selecting a strategy which only addresses one of these elements."

 

Notes to editors

1 AXA Rosenberg/MSCI/Datastream as of 22 October 2014

 

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