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Defensive Strategies for Portfolios

Portfolio Manager's Dilemma?

A number of equity markets continue to make new all-time highs, despite several factors, not least the coronavirus outbreak, perhaps suggesting that at least a degree of caution might be warranted. Investors appear to sense that should things get more difficult economically, central banks will continue to turn on the liquidity taps.

In this blog post, Savvy Investor has collated a number of papers which outline a range of strategies and approaches in which investors can obtain some downside portfolio protection. These include dividend investing, minimum variance, and low volatility investing, which aim to offer some downside protection, whilst potentially, allowing investors to participate should markets continue to rise.

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Dynamic Strike Selection in Nasdaq-100 Short Put Spreads (Nasdaq, 2020)

This Nasdaq paper looks at the performance of both static and dynamic methods for selecting strike prices in Short Put Spread strategies on the Nasdaq-100 Index. It finds that a dynamic strike selection, using ex-ante optimization, more than meets performance objectives, even making simplistic assumptions about NDX returns.

Rethinking safe haven assets (JP Morgan AM, 2019)

JP Morgan AM discusses the role of traditional safe-haven assets: typically AAA-rated sovereign debt, reserve currencies and gold in portfolio protection. They also look at alternative assets, including core real estate and infrastructure and investigates whether these might also play a role in the 'defensive' part of a portfolio.

Video: Three Ways to Bolster Downside Protection (AB, Nov 2019)

For compliance reasons, this paper is only accessible in North America and South America

In this video, AB's Robert Milano, Product Specialist, U.S. Equity Portfolios, notes the strong performance in U.S. equity markets recently and outlines three different strategies that investors might employ which offer varying degrees of portfolio protection. These include looking at World (ex U.S.) markets, long-short strategies, and replacing equities with high yield bonds.

Managing Downside Risk with Global Macro Strategies (Morgan Stanley IM blog, Jan 2020)

Morgan Stanley IM's Robert Rafter argues that two strategies often employed by global macro managers - long volatility and tail risk - could potentially be appropriate strategies to consider in anticipation of a market setback.


S&P High Yield Dividend Aristocrats®: A Practitioner’s Guide (2019)

S&P Dow Jones Indices outlines the merits of dividend investing noting that such strategies may appeal to a range of investors. Higher income, lower volatility and better downside protection are just some of the features that have historically been found to exist in equity dividend strategies.

China A Share Market: Blending low volatility with dividend yield (S&P Dow Jones Indices, 2019)

This paper by S&P Dow Jones Indices examines the potential benefits of blending high dividend and low volatility strategies in the China A share large-cap equity market.


Managing Market Volatility: Protecting institutional portfolios (FTSE Russell, 2019)

In this round table hosted by Clear Path Analysis and sponsored by FTSE Russell, the panel explores alternative index approaches, minimum variance, low volatility factors, defensive multi-factor strategies and target exposure factors.

An Analysis of Factor Exposures of Minimum Variance Strategies (Qontigo, 2019)

In this paper from Qontigo, they argue that minimum variance strategies not only enable investors to reduce the risk of portfolios but also assist in harvesting positive and statistically significant low volatility premia. However, they also caveat that unconstrained minimum variance strategies often have substantial exposures to other style factors with persistent and sometimes negative performance characteristics.

Overview: Designing More Defensive Factor Solutions (Scientific Beta, 2019)

Scientific Beta outlines several defensive strategies, based on a low-volatility, factor-based approach, which they argue is more robust than many popular optimization approaches.


U.S. Equities: Low volatility equities - Why now, why active? (BMO GAM, Jan 2020)

BMO GAM's Disciplined Equity team believes that investors many be conflicted by what is happening in the U.S. equity market as it repeatedly pushes to new highs. They suggest active, low-volatility strategies might be a potential solution.

S&P 500® Low Volatility Index: Five decades of history (S&P Dow Jones Indices, 2020)

S&P Dow Jones Indices highlights the fact that they have recently extended the returns history for a widely followed benchmark, the S&P 500 Low Volatility Index, back to February 1972. This extended database may offer investors new insights into how low vol performs in different market cycles.

Beware what lurks beneath the surface of low volatility (Qontigo blog, Nov 2019)

Qontigo notes the recent relatively low volatility in the markets, despite several events unfolding where one might typically expect to see volatility pick up. More in-depth analysis suggests that portfolio risks from equities have risen sharply while changing correlations with other asset classes has only served to accentuate the risks. Much of the additional risk appears courtesy of lower interest rates.

Intech Equity Market Stress Monitor: 1Q20 Quarterly Report

For compliance reasons, this paper is only accessible in certain geographies

Intech highlights their Q1 Equity Market Stress Monitor. It notes low levels of market volatility and suggests caution in both Developed and Emerging Markets.