Seeyond's Nicolas Just discusses volatility management strategies and outlook for the overall market in the latest in our series on fund managers and market experts.
Mr Nicolas Just is head of smart beta investments at Seeyond, an investment division of Natixis Asset Management.
He joined the Japanese equities management team of Natixis in 2006 as an analyst/equity portfolio manager. In 2008, he became head of its smart beta investments team and then head of the core equity management team in 2010.
As at end May this year, the year-to-date total returns for the Seeyond Equity Volatility Strategies Fund and Seeyond Global MinVariance Fund are -8.9 per cent and 7.58 per cent, respectively.
Q Why did the firm decide to launch the two funds for retail distribution?
A In the past, retail investors were comfortable with a standard equity/government bonds allocation. Government bonds were acting as a safety net, performing best when equities were crashing. In a low-rates world, retail investors are looking for new ways to diversify their portfolio and active volatility strategies are good candidates to achieve that. This is why we launched the funds for retail distribution.
Q What is the investment concept of volatility management and how does it work?
A Volatility is a measure of risk surrounding the price of a security. This measure aims at quantifying the intensity at which the price of this security can move up or down in a given period.
Generally speaking, the more volatile a security is, the larger its daily movements. Volatility management involves actively taking positions on the future volatility of a security or equity index through the use of derivatives products.
Including an active long volatility strategy in your allocation allows you to be more comfortable with the risk of the rest of your portfolio, knowing that this volatility investment will act as a safety net in case of a sudden and/or severe market downturn.
MR NICOLAS JUST
Q How do equity volatility strategies aim to deliver investment performance?
A Equity volatility tends to rise as equity markets sell off, and then reverts to its long-term average when markets are normalised.
In this context, we can build a volatility strategy which aims at behaving like an insurance policy of sorts (though with no explicit guarantee). To illustrate, an insurance policyholder pays premiums in return for the prospect of collecting a lump sum whenever a crisis event arises.
In the case of equities, when markets are quiet or bullish, volatility or risk is low, and the strategy builds protection against a future risk "explosion", that is, a systemic market crisis. Since volatility usually spikes when traditional markets (such as equity and bonds) are tumbling, volatility strategies aim at delivering positive returns precisely when all other asset classes are failing together, by cashing in on volatility appreciation.
Q What are some other volatility management strategies?
A To protect a portfolio from volatility on the markets, another solution is to use a "minimum variance" approach.
By selecting stocks that bring the total level of risk of the entire portfolio to its absolute lowest possible level - using stocks that foster diversification and help lower the absolute risk level of the entire portfolio - at any single point in time, those strategies aim to act as a "4 by 4" car (four-wheel-drive vehicle), that can handle rough stretches ahead, to provide better risk-adjusted returns over a full economic cycle. An all-weather strategy, so to speak.
Q How can such strategies form part of the asset allocation in an investment portfolio?
A Including an active long volatility strategy in your allocation allows you to be more comfortable with the risk of the rest of your portfolio, knowing that this volatility investment will act as a safety net in case of a sudden and/or severe market downturn.
Q What are some of the key macroeconomic events this year that may cause volatility to spike?
A Macro figures are in a positive momentum worldwide at the moment, hence there is very low volatility across all markets. The issue is that market expectations are now very high, so we could expect some deterioration later this year if the global economy fails to deliver on those high expectations.
Q How should investors position their portfolios in the face of such market volatility?
A Three words: diversify, diversify, diversify. This means to open your allocation to strategies that are uncorrelated to traditional asset classes (such as equities and bonds), and/or investing in equity strategies, such as minimum variance, which help navigate tumultuous markets by offering a consistent reduction of risk to help wind out adverse events.
Q What is your outlook for the equity markets for the rest of 2017?
A Predicting equity market movement is an iffy endeavour, given last year's market reactions to such unforeseeable outcomes such as Brexit or the Trump election.
As we've witnessed in 2016, markets neither reacted very negatively nor for a long period to such adverse news. Today, investors are becoming more pessimistic when apprehending the political climate, but at the same time more complacent about its impact on financial markets.
This decline in risk aversion (and volatility) should go on as long as actual data supports this inflection. Should corporate results or macroeconomic results, however, begin showing signs of weaknesses given already high valuations, and not deliver on the expectations placed upon them since the Trump election, market reaction could display no sign of forgiveness.
A version of this article appeared in the print edition of The Sunday Times on July 02, 2017, with the headline 'Navigating through volatility'. Print Edition | Subscribe
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