// GESPONSORDE BIJDRAGE
A case for the defence BY IHESHAN FAASEE, MANAGING DIRECTOR, CLIENT PORTFOLIO MANAGER, INTECH INVESTMENT MANAGEMENT
The path to success begins with knowing your objective, understanding the path and accepting the exposures required to achieve the goal... Any deviation from this trajectory will
these strategies, as constructing an
comparison to their cap-weighted
require input measurement and
effective defensive portfolio is
counterparts. Index providers make
recalibration to stay the course toward
impossible without reliable assessments
subjective decisions that resemble those
reaching success. To this end, the
of a stock’s volatility moving forward.
of active strategies – about constraints, rebalancing frequency, and even
inclusion of defensive strategies requires
optimising for currency risk. The result
presence has as they sit alongside the
Measurements of risk: individual stock and portfolio
array of ‘traditional’ equity strategies:
At the portfolio level, heuristic strategies
index providers, who are taking
defensive equities contribute returns to
may assume a reduction in risk as a
substantially different approaches to
the total portfolio with a frequency
natural residual based on the low
construction. And, in some cases, they
which tends to be uncorrelated to other
volatility stocks they include, without
may have less transparency than
long-only equity strategies, zagging
assigning an explicit objective function
actively managed strategies!
when others zig.
to them within their process. Beyond
an understanding of the role their
may be far more variability between
Evaluating results
their ‘proprietary’ portfolio optimisation
Methods for quantifying the expectations
input to measure risk at the security
designed to minimise risk, but it’s critical
and effectiveness of defensive equity
level, which may be statistical (for
to dig deeper into what this really
strategies range from the common to the
instance standard deviation, beta),
means. Are they merely applying
more esoteric or convoluted. Here we
fundamental (for instance measures of
weighting limits for diversification
present the metrics you might expect to
quality or value), or some combination
following their selection model screen?
find on the ‘back of the envelope’, along
thereof. Estimates of stock volatility
Are they genuinely accounting for
with some interesting, less-common but
must strike a balance between being
correlation between stocks, or is their
still-insightful measurements.
outdated and overweighting recent
optimisation no more than a slightly
history. It’s in these estimates that you
more sophisticated weighting scheme on
Given the frequently asymmetric nature
might consider the real ‘secret sauce’ of
top of a ranking approach? In other
of these strategies by design, a sample
words, is the heavy lifting already done
size of real or even back-tested results,
in the screening step, to the point that
including a full market cycle, is necessary
there’s little room left in a narrow
for setting expectations across all market
universe to really take advantage of a
environments. Reducing these statistics
covariance matrix?
to a single annualised figure for the
Photo: Archive Intech IM
that, many quantitative managers tout Models typically include some kind of
entire period may work as a shorthand to While more naïve, passive-seeming
summarise their long-term outcomes,
smart beta options are plentiful, many
but for some, rolling periods (for instance
managers aren’t content to rely on the
one, three, or even five years) can help
low volatility ‘anomaly’ to match or beat
illuminate variations over time within
the market over the long term. They may
those different environments.
prefer to add an alpha source to the mix – often their proprietary return forecast
Classifying their outcomes
model, be it based on valuation,
Despite the substantial growth in AUM
momentum, or more exotic
over the last 10 years, live track records
combinations of factors.
available for this category are still relatively short, and precious few include
IHESHAN FAASEE
90
FINANCIAL INVESTIGATOR
NUMMER 5 / 2019
But even low or minimum volatility
anything resembling a full market cycle.
indexes aren’t truly passive by
Descriptions of approaches are far easier
