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Irish Pensions Magazine Autumn 2016
Advertorial
Expert Opinion
which they are responsible. Equities provide a valuable
growth element for schemes and since markets began
their recovery in March 2009 they have been on a
strong upward path with some markets reaching all
time record highs in recent months.
On a valuation basis global equities are currently above
their long term average. A benign economic outlook
should support modest growth in earnings in the
year ahead. However the current consensus for global
earnings growth in 2017 of 13% appears ambitious
when considered in the context of economic growth
of around 2.5%. Typically this would be associated with
mid-single digit growth in earnings and share prices.
There is a real risk that downgrades to earnings and
disappointing earnings outcomes will be a regular
feature in 2017.
Against this backdrop trustees looking at their asset
allocations may be tempted to bank some of their equity
gains and seek lower risk options. However, negative
yields and concerns about rate rises make bonds less
attractive at current levels.
One option is for investors to consider low volatility
stocks as a distinct asset class. Financial theory suggests
that investors should expect higher returns for taking
greater risk but research has shown that low volatility
stocks have delivered superior returns compared to
high volatility stocks. This low volatility anomaly is seen
to be exhibited across times and regions.
Irish Life has developed a Global Low Volatility Active
Equity Fund which is designed to allow investors to
benefit from this market anomaly, delivering superior
returns while providing downside protection over a
full market cycle by selecting equity securities, based
on a diverse range of factors, compared to traditional
capitalisation weighted equity benchmarks.
The strategy gives investors the opportunity to remain
fully exposed to the equity risk premium while aiming
to deliver lower volatility and reduced drawdowns
during market crashes. These severe market events are
occurring with increasing frequency. On average global
markets have fallen by 20 percent over 2 –3 years and
by 30 percent every 9 years.
The Global Low Volatility Active Equity Fund aims to
minimise drawdown experience by reducing the extent
of losses, the period over which losses are incurred and
the frequency of losses. We apply a multi-factor model
which considers valuation, earnings andprice riskmetrics
along with sector allocation to provide complementary
protection. It has been back tested in multiple markets
scenarios and been demonstrated to deliver lower
volatility, significant reduction in drawdowns higher
annualised returns while maintaining participation in
market upside.
While the Fund will tend to be overweight defensive
sectors such as utilities, the screening process eliminates
stocks which are overpriced on a valuation basis. The
overall strategy targets broad diversification across
sectors and actively limits sector concentration.
Pension trustees will continue to have to grabble with
many issues in the years. Strong asset growth has helped
their funding position but brings challenges in its own
right. Seven years of strong equity market returns
provide an opportunity to explore new approaches
which maintain exposure to upside potential but
minimise the impact from market falls. Low Volatility
investing is a strategy that may provide trustees with
a timely outlet for risk reduction while preserving the
opportunity for future growth.
Irish Life Investment Managers Limited is regulated by the Central
Bank of Ireland
Irish Life Assurance plc is regulated by the Central Bank of Ireland
Investmentsmaygodownaswell asup. Thismaterial is for information
only and does not constitute an offer or recommendation to buy
or sell any investment and has not been prepared based on the
financial needs or objectives of any particular person. It is intended
for the use of institutional and other professional investors
Kevin Barrett
Defined Benefit Portfolio Manager
Irish Life Investment Managers
Article Author
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