Managed volatility strategy to maximise returns
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Samantha Hodge is a journalist with InvestorDaily, a Sterling publication.
Investors do not need to take on additional risk in order to achieve higher returns, according to State Street Global Advisors (SSgA).
"Generally speaking, diversifying across multiple benchmark-constrained equity portfolios has not worked for investors, whether from a diversification, return or risk perspective," SSgA vice president of wholesales Amy Johnston said.
"Alternatively, a core allocation to a managed volatility strategy can be complementary and may deliver on all fronts - diversification as well as maximising return per unit of risk.
"This type of portfolio is expected to return throughout the cycle, performing well in up and down markets," she said.
SSgA head of Australian active equities Olivia Engle explained that the managed volatility strategy would maximise return per unit of risk, experiencing lower drawdowns on the market.
"Additionally, the approach considers the benchmark index to be irrelevant for determining portfolio positions, removing tracking error constraints. A benchmark-agnostic approach is really asking investors to think differently," she said.
Engle said while traditionally high-return investment required high risk, this may not be the case.
"The 'lottery effect' biases investors towards stocks that have a small probability of achieving very large returns, while incentive structures encourage equity managers to minimise the difference in returns relative to a benchmark such as the S&P/ASX 200," she said.
"Subsequently, there is greatly reduced incentive to invest in low-volatility stocks because they are, by definition, less correlated with the index," she said.