FTSE launches benchmarks that control volatility
FTSE has become the latest index provider to launch equities benchmarks whose aim is to control volatility, which has recently been worryingly high in developed market, cap-weighted indices that allocators typically used in the past.
The FTSE Global Minimum Variance Index Series comes at a time global equity volatility, and allocations to cap-weighted benchmarks, absorb large portions of investors’ total risk budgets.
It also comes in the wake of numerous research showing low-volatile stocks actually outperform more volatile equities over time, not least because they fall less sharply in periods when markets decline.
Alongside FTSE, Russell, Standard & Poor’s and MSCI have also been developing and launching equity benchmarks conscious of volatility, while fund managers such as Unigestion and Lazard Asset Management have actively managed portfolios focusing on the same metric.
Peter Gunthorp, FTSE’s managing director – research and analytics, said: “In the current economic environment and given the nature of equity market returns in recent years, investors are increasingly interested in lower volatility investments which concentrate on improving their risk return profile whilst maintaining their allocation to global equity markets.”
FTSE’s new indices track equities in the developed world; developed Europe (with and without the UK); the eurozone; Asia Pacific (with and without Japan); Japan; and the US.
FTSE says the benchmarks reduce volatility through a rules-based approach using historical variance. Expected returns play no role.
But active managers have pointed to the need to go beyond a ‘rules-based approach’ in constructing minimum variance strategies.
Lazard Asset Management portfolio manager Susanne Willumsen, for example, has noted active managers also take into account evolving cross-correlations between stocks; they find positions or markets that offset one another’s risk; they size positions; and limit some exposures.
These activities cannot simply be built into index construction rules, they add.