Minimum Variance Has Delivered in This Downturn

One of the major advantages of minimum variance strategies is that the lower-than-market volatility and beta should pay off by offering protection when the market stumbles, as it has recently. We set out to confirm that investors got what they paid for during the recent market rout by looking at several US-based ETFs, along with one global fund.  The (not unexpected) good news  is that these funds did exactly what they promised. Since the market began to slide in October, the funds we studied have far outpaced the market. And year-to-date, whereas the US market is down 4-5% through December 19, the three US minimum variance funds are still slightly up. The global market as defined by the STOXX 1800 is down more than the US, 8% year to date, and in contrast to the US funds, the non-US fund has fallen a bit, but far less than the market. In all cases, the funds held their own earlier in the year when the market was still rising.

Attribution shows that underweighted Volatility and Market Sensitivity (beta) were major drivers of the excess return, but in all four funds the “stock specific” component of return was a significant contributor as well. Most notably, they were all underweight Apple and Amazon. Industry bets, particularly underweights in Oil and overweights in Utilities were also quite helpful. Significant returns accrued to the non-US fund from being underweight the US and overweight Hong Kong. In most cases no factor stood out as being a big drag on returns, save for the small-cap bias they all had.

There are differences in the funds of which investors might want to be aware, however. SPLV fared much better than the other two US funds in the downturn, and also had a higher return year to date. Throughout the year it had higher predicted active risk, and realized much higher active risk than the other US funds, despite having lower total risk. (By construction, all funds had significantly lower total predicted risk than the market.) Risk factor and industry exposures in the funds were also quite different, with SPLV and USMV having higher Dividend Yield and Leverage tilts than LGLV, and SPLV having the smallest cap profile. And although SPLV was hurt more by the small-cap bias, it also had a much more negative exposure to Market Sensitivity, which offset the comparatively larger shortfall from Size. In general, the sources of risk and return in the global fund were similar to those of the US funds.

RETURN DATASource: FTSE Russell, Standard and Poor’s, STOXX, Axioma

*Average of daily forecasts in 2018
Source: FTSE Russell, Standard and Poor’s, STOXX, Axioma


Melissa R. Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.