High conviction approach can reduce volatility: SSgA

portfolio management market volatility

25 November 2011
| By Tim Stewart |
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A move away from cap-weighted constraints and a focus on solid companies with good dividends can mitigate market volatility, according to State Street Global Advisors head of active equities Olivia Engel.

The SSgA Australian Managed Volatility Alpha strategy has outperformed the S&P/ASX 200 All Australian Accumulation Index by 5.23 per cent since its inception in October 2009, she said.

"The object of the strategy is to maximise total return and minimise total risk. With this objective, we can deliver higher returns relative to the equity market, deliver them with lower risk, and reduce drawdowns," Engel said.

Because the strategy has lower drawdowns in falling markets, it benefits from the effect of compounding over the long-term, she said.

The portfolio targets quality companies with growth capability, strong cash flows and high but sustainable dividends, Engel said. It takes a "bottom-up" approach to stock selection, and there is no thematic overlay applied to the strategy, she said. 

More importantly, the strategy removes cap-weighted restraints - that is, it ignores the fact that BHP Billiton takes up to 12 per cent of the market and the big four banks comprise one quarter of the market cap, Engel said.

The Australian Managed Volatility Alpha strategy is fully invested in equities, and therefore has no option to move into cash in a downturn, she added. 

"We're not talking about minimising risk versus the market return, we're talking about minimising total risk. So you'll find that the profile of returns of the strategy can be quite different from the market," Engel said.

SSgA has been incubating the fund for the last two years using seed funds, and it is preparing to take the fund to market. The capacity of the strategy will be $3 billion, according to Engel. 

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