The Low Volatility strategy has been a big winner for investors for over three years in a very difficult and volatile environment for equities.
In response to perpetually low interest rates in the post-GFC world, Rivkin created the Low Volatility strategy which was designed to exceed the returns available in fixed interest but without the volatility of typical equities investments.
While our long-term return target is roughly 5-6% per annum after fees, the performance of the strategy has far exceeded that long-term target since inception and Wholesale Investors have been able to enjoy that for over three years. Recognising the success of the strategy and the appeal to all retail investors, we introduced the strategy to everyone through the Capital Stable separately managed account (Mainstream SMA) product a little over one year ago.
We typically provide monthly updates on this product to those members investing in this strategy, and with the outlook for long-term interest rates worsening as the pandemic puts a handbrake on global economic activity, we did a deeper analysis of the actual results over the last 3 years which we thought may be of interest to other members currently unsure what to do with cash earning little on deposit.
Please read below for the most recent monthly update.
LV – Monthly Update – September 2020
The LV strategy declined marginally in September, with the Equivalent Unit Price declining 0.70% to finish the month at 1.2961. Year-to-date, the LV strategy has gained 6.93%, net of fees, over the first nine months of the year.
The decline in US equities was the largest detractor to performance for the month, however this was somewhat tempered by a declining Australian dollar. The Australian dollar gold price was also softer, however bonds rallied quite strongly. The Australian budget was handed down this week, which included bringing forward personal tax cuts, and a large infrastructure spending package. All in all, the Federal Government is prepared to provide ample fiscal support to get the economy back on track, the risk being an uptick in inflation in the years ahead. From the portfolio, stocks and gold would provide the best protection to an inflationary environment, while bonds would likely suffer.
It has been three years since the Low Volatility portfolio was first introduced to wholesale clients, so we wished to provide a longer-term review of how the strategy has performed over this time. The first chart plots the equity curve of the LV strategy against the ASX200 Accumulation Index. Typically, over a 3-5 year investment horizon, we would expect the LV strategy to underperform a straight equities portfolio, and this would have been the case if not for the severe selloff earlier this year, brought on by the Coronavirus pandemic. While the total return net of fees of the LV portfolio has been 29.61%, the ASX200 Accumulation Index has returned 14.49% over the corresponding period.
Chart 1: 3-year Performance Comparison.
While the past three years have provided a solid return, it is this return relative to the volatility/risk which is important. What attracts many of our investors to the LV portfolio is the low volatility (no pun intended), which we believe is best demonstrated in two ways, the first being the drawdown from the high water mark, and the second being the distribution of monthly returns.
The drawdown is the amount, expressed as a percentage, that the strategy declines from the high-water mark, at any point in time. It is an important measure of risk, as it relates to the ‘comfort level’ of an investment strategy. The shallower the drawdown, the easier a strategy is to follow, as investors are less exposed to declining capital value, even though that decline has not been crystalised. The below chart plots the performance of the LV strategy in blue, the high-water mark of the strategy in orange, and the drawdown in grey, on the right-hand side axis. As shown, the deepest drawdown experienced over the past three years occurred in March 2020, at a time when equity markets were falling heavily. The peak drawdown was 5.49%.
Chart 2: LV Equity Curve, High Water Mark, and Drawdown.
To demonstrate how this differs from a straight equities portfolio, for which we are using the ASX200 Accumulation Index as a proxy, we can see that equities at the same point experienced a drawdown of 41.3%. Chart 3 below, plots the drawdown levels for both the LV strategy and the ASX200 Accumulation Index over the past three years. Not only was the peak drawdown for LV markedly less, but the strategy has held its value much better than equities at any other points in time as well.
Chart 3: Drawdown Comparison
The second way in which to demonstrate the low volatility nature of this portfolio is to look at the distribution of monthly returns over the past three years, and again compare this to those of the ASX200 Accumulation Index. For the LV strategy, the distribution of monthly returns can be seen below. Since September 2017, there have been 13 months with a negative return, the worst month being -0.91%. Compared to the ASX200 Accumulation Index, which has also had 13 negative months over this time, however considerably worse in size, with the largest monthly decline of -20.65%.
Chart 4: LV Monthly return distribution
Chart 5: ASX200 monthly return distribution
In summary, we believe the past three years demonstrate that the Low Volatility portfolio is doing as intended, by providing considerably better risk adjusted returns than straight equities.
If you have any questions regarding the above or your investments with Rivkin in general, please call us on 02 8302 3605.
