Pioneer launches European equity volatility strategy

Pioneer Investments has launched the European Equity Optimal Volatility strategy, which will be led by Diego Franzin, head of Equity Europe, and Pasquale Galassi, European Equities portfolio manager.

The strategy will rely on the manager’s already established European Equity Research portfolio, which uses bottom-up analysis, and an actively managed and uncorrelated volatility component using options and futures, to achieve better risk-adjusted returns that from the equity market alone.

Pioneer said the launch comes in response to concerns among equity investors about ongoing volatility spikes being experienced.

Diego Franzin said: “’The path towards a rate normalisation is likely to be volatile for risky assets and, understandably, risk conscious equity investors are concerned about the volatility associated with a traditional equity strategy”

“However, the challenges that come with fixed income at the bottom of a long-term interest rate cycle mean that balancing an equity portfolio using a traditional equity/fixed income split can now carry significant duration risk over the medium to long term, as well as in many cases a negative carry for sovereign issuers.”

However, these risks noted also therefore present an investment opportunity, Franzin adds.

“’The asset class volatility can offer unique diversification benefits. ’The inverse correlation of equity versus volatility is stronger than equity versus fixed income. The correlation over the last year of the MSCI Europe versus fixed income is -0.3, whereas the MSCI Europe versus volatility is -0.8 (April 2015-April 2016).’’

“’We run a flexible mandate that can be changed rapidly depending on the risk framework. We assess the risk environment on a daily basis and can increase or decrease our exposure, aiming for asymmetric upside/downside capture ratio.”

The commitment to actively managed exposures means that the strategy differentiates itself from other, quantitatively-driven minimum variance strategies, argues Franzin.

“Unlike other strategies that target low volatility, Pioneer’s European Equity Optimal Volatility strategy aims to optimise the risk/reward ratio, not just lower the risk. Additionally, actively managed exposure to both the equity market and volatility offers superior diversification potential versus strategies where single factor exposure – through low volatility stocks – dominates, resulting in an under-diversified portfolio.”

 

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