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Irish Pensions Magazine Spring 2015
Analysis
Advertorial
GETTING THE BALANCE RIGHT
However, we believe that there are ways to optimise
the balance of needs through a variety of overlay
and direct investment strategies. In particular,
investors could consider a Target Volatility Trigger
(TVT) framework, which seeks to provide downside
protection and yet leaves potential for upside
participation; or asset allocation strategies which
dynamically allocate according to the prevailing
market conditions, and can be a good way to help
provide downside protection and potential alpha
generation. Overlay programs using listed futures
and options to create put-spread or put-spread collar
strategies have also historically provided downside
protection.
TIMING IS CRITICAL
Aggressive de-risking can prove costly should the
markets continue to rise, and yet a ‘defensive’ stance
risks missing continued upside potential, particularly
against the backdrop of ultra-low interest rates and
QE. In light of this, we believe that implementing
downside risk protection while costs are low may
make sense. Our experience has been that it is always
better to start implementing portfolio protection
decisions when others are greedy, when there is time
to consider alternatives and also when the cost of
implementing these decisions is low. When markets
are in crisis mode — as they were in September 2008
and August 2011 — it is often, quite simply,
too late.
WAYS TO TACKLE EQUITY RISK
Target Volatility Triggers
Can provide a stable volatility level in the portfolio.
Market Regime Aware Investing
Via Dynamic Asset Allocation Funds.
Derivatives Overlays
Option-based overlays and volatility futures.
Alternative Strategies
Liquid alternatives, such as Managed Futures and
Global Macro and advanced beta equities, such as
Managed Volatility.
Fundamentals
Fundamentals may also present potential
pitfalls. From eurozone concerns to
geopolitical issues in Ukraine or the Middle
East, spats between China, Vietnam and
Japan are causing concern, and China’s
shadow banking sector also casts a pall.
But be realistic about the effect of geopolitical
risks — SSGA has researched their impact
and found that they may not have the lasting
long-term effects that many ascribe to them.
However, many investors cannot bear even
short-lived losses and avoiding or severely
limiting them makes sense in terms of time
to recovery. In any case, market-based
events can and typically do affect portfolios
deeply and broadly over the long term. The
right protection strategy should help defend
against both types of risk.
Source: Bloomberg Finance LP. As of 27 January 2015. Past performance is not
a guarantee of future results. Index returns are unmanaged and do not reflect the
deduction of any fees or expenses. Index returns reflect all items of income, gain and
loss and the reinvestment of dividends and other income.
Article Author
Niall O’Leary
Managing Director, Head of
EMEA Portfolio Strategists Group
State Street Global Advisors
70
110
150
190
230
2009 2010 2011 2012 2013 2014
Rebased to 100
S&P500 Index
MSCIEmerging Markets Index
STOXXEur 600Price Index EUR
FTSEAll-Share Index
Equity Indices at All-Time Highs
0
1
2
3
4
5
6
7
8
2009 2010 2011 2012 2013 2014
Bond Yields at All-Time Lows
Percent
US
UK
Germany
France
Italy
State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Incorporated and registered in Ireland at Two Park Place, Upper
Hatch Street, Dublin 2. Registered number 145221. Member of the Irish Association of Investment Managers. Investing involves risk including the risk of
loss of principal. Past performance is not guarantee of future results. The whole or any part of this work may not be reproduced, copied or transmitted or
any of its contents disclosed to third parties without SSGA’s express written consent. The information provided does not constitute investment advice as
such term is defined under the Markets in Financial Instruments Directive (2004/39/EC) and it should not be relied on as such. It should not be considered
a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives,
strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional
advisor. The views expressed in this material are the views of Niall O’Leary through the period ended 23 January 2015 and are subject to change based
on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such
statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. © 2015 State
Street Corporation – All Rights Reserved
