The performance of low volatility and benchmark equity strategies for retirement portfolios was likened to the tale of the tortoise and the hare at the 7th annual Post-Retirement Conference.
Roy Maslen, chief investment officer – Australian equities, at AB (formerly known as Alliance Bernstein), presented research which showed a well-constructed low volatility portfolio would eventually beat the benchmark through a lower rate of drawdowns in market downturns.
He estimated that a portfolio of $100,000, drawing down $10,000 in income would last for 15 years if invested in a passive equity portfolio, but could last for 24 years if invested in low volatility equities.
The stocks in AB’s portfolios are chosen from fundamental research, for their high income characteristics and from a policy of having no more than 3 per cent in any one stock.
Maslen said research going back 25 years shows such portfolios can still grow earnings when the markets are down, unlike conventional portfolios which can lose as much as 25 per cent.
He advised that such strategies would necessitate funds taking the mental leap to throw away peer review risk.
Richard Dinham, head of research State Super Financial Services (SSFS), who spoke on the same session, revealed his fund’s low volatility equities had reduced volatility by 30-35 per cent reduction in the last three years.
Back testing showed that in 2008 with the market down 35 per cent in 2008, its portfolio would only be down 20 per cent. The beta of portfolio was 85 to the market, so that if the market was up 10 per cent, it would only be up 8.5 per cent.
Dinham echoed Maslen’s point about peer risk by asking delegates: “Are you willing to underperform the peer group at certain times – and we certainly have – if you want to move forward?”
The SSFS asset allocation includes a mix of managed volatility equities, quality growth equities, active emerging markets, managed volatility emerging markets, convertible bonds and some alternatives.
Dinham said this had led to a much tighter distribution of returns than the average Australian super fund, with a much shorter left tail.
The Q&A at the end of the session Maslen was asked whether a derivative overlay to a passive equity portfolio might be equally successful in protecting against drawdowns. He replied such a strategy would fail the ‘barbeque test’ and therefore was unlikely to be popular with members who wanted ‘simple and transparent’ solutions, but also that there was mixed evidence as to whether derivative overlays have delivered value.
