Equity strategies to consider to help weather volatility
A short walk down memory lane
Some investors may recall that high quality and volatility managed strategies were praised in the aftermath of the 2008-2009 market correction because they had held up relatively well during that turbulent time. However, enthusiasm has since waned because neither high quality nor volatility managed strategies have posted exceptionally strong performance since that period. It’s true: since the market bottom in 2009, both strategies have lagged the broader U.S. stock market (represented by the Russell 1000® Index).
Historically shining in periods of low market returns
During periods of lower returns (defined as three-year periods when the Russell 1000® Index averages less than 5%), the Russell Defensive Index and the BXM have both posted better average returns than the broad market. Since July of 1986 (inception date of the BXM), the Russell 1000® Index has produced “low” three year returns 28% of the time. During those periods, defensive and low volatility strategies have outperformed the broad market by approximately 2% per year on average.
Historically winning in periods of higher market volatility
To evaluate how these strategies have historically held up during periods marked by higher market volatility, we divided the market history into thirds based on the level of volatility over three-year time frames. During the periods with the “lowest” volatility, the broad market generally outpaced defensive and low volatility strategies. However, during periods with “medium” and “high” amounts of volatility, the story shifts. Defensive strategies beat the broad market in both scenarios, and low volatility strategies top both in higher volatility markets.
Historically outpacing during periods of low returns and high volatility
Based on the results high quality and low volatility strategies posted during periods of either low returns or high volatility, it should come as no surprise that these strategies have also fared better than the broad market when markets are marked by both volatility and low returns.
The bottom line
It’s difficult to project where the market will go next. There are indications that volatility may be picking up again and many market observers are projecting a lower return environment going forward. Of course, just because high quality and volatility managed strategies have helped portfolios weather high volatility and low return environments in the past, doesn’t mean they will be able to reproduce similar results in the future. However, it may be worth considering them for the U.S. equity part of client portfolios.1 The VIX index is the commonly used name for the CBOE Volatility Index.