Roy Maslen, Chief Investment Officer—Australian Equities
We believe “smoothing the ride” through the market’s ups and downs requires careful design and dynamic active management. The final of our four key steps in seeking to implement a low-volatility equity strategy successfully is:
Manage macro risks—and don’t manage one risk by taking on another.
It’s important to avoid creating a portfolio that solves one problem but creates another.
One of the challenges of implementing a low-volatility strategy in Australia is that by just buying traditional “defensive” stocks with big index weights, it’s possible to end up with a portfolio dominated by real estate investment trusts, utilities and infrastructure stocks. Such a portfolio would be heavily exposed to interest-rate risk.
Other methods of designing a low-volatility strategy could result in a portfolio having large amounts of risk from foreign exchange, US policy, European Union politics and China’s economy, to name a few factors. It’s always possible to add a stock to a portfolio for the “right” reasons (stability, quality and price), only to see it underperform because the related macro risks were poorly understood.
Careful portfolio construction should aim to identify and reduce such risks.
Revisit the four key steps in a low-volatility equity strategy