Low volatility equity investing works

Low volatility equity investing works as it delivers higher risk-adjusted returns across market cycles.

Source: Eastspring Investments, Bloomberg, MSCI Indices, data as of 31 December 2001 to 31 July 2016.

Myth – Investors need to take higher risk in order to get higher returns.

Fact – Low volatility investing has produced higher returns with lower risk.

• Over the last 10 years, the MSCI All Country World Minimun Volatility and Asia Pacific ex. Japan Minimum Volatility Indices have produced higher returns with lower risk.
• The low volatility result is not only due to lower drawdowns during adverse market conditions but the implicit bias of the strategy against large-cap stocks also underpins resilience. This results in a strategy which has delivered higher returns but with lower risk.

Source: Eastspring Investments, in USD as at 31 August 2016. Please note that there are limitations to the use of such indices (index) as proxies (a proxy) for the past performance in the respective asset classes/sector. The historical performance or forecast presented is not indicative of and should not be construed as being indicative of or otherwise used as a proxy for the future or likely performance.

• A portfolio with lower drawdown helps to accumulate returns over the long term through gaining more by losing less.
• It is important to consider the effects of declines in portfolio value as much as it is to be hopeful for potential capital gains. The measure of how much a portfolio declines in value is termed as drawdown. During market declines, a portfolio with a lower drawdown would have fallen less whereas a portfolio with a higher drawdown would have fallen more.

Source: Eastspring Investments

Myth – All low volatility strategies are expensive.

Fact – The Eastspring Investments – Asian Low Volatility Equity Fund and the Eastspring Investments – Global Low Volatility Equity Fund have valuations similar, or better, than the MSCI Asia Pacific ex. Japan and MSCI All Country World Indices respectively.

• Pure low volatility strategies may appear more expensive than the broader market on measures such as price-to-book and price-to-earnings. Eastspring addresses this by removing stocks with poor valuation and sentiment.
• Over time, stocks that are cheap tend to outperform and stocks that are expensive tend to underperform. Similarly, stocks with poor analyst sentiment also tend to underperform on a historical basis.
• The below valuation and sentiment adjustment reduces both the price-to-earnings ratio of the portfolios on a one-year forward basis and the price-to-book ratio closer to or below that of the respective broad market indices and significantly below that of the respective Minimum Volatility Index.

Source: Eastspring Investments, MSCI and Axioma,30 September 2016. Please note that there are limitations to the use of such indices (index) as proxies (a proxy) for the past performance in the respective asset classes/sector. The historical performance or forecast presented is not indicative of and should not be construed as being indicative of or otherwise used as a proxy for the future or likely performance of the strategy.FY1=Forward 1 Year estimate (Source: Factset). Any prediction, projection or forecast is not necessarily indicative of the future or likely performance.

Myth – Low Volatility investing only considers a smaller universe of ‘less-volatile’ stocks compared to active managers or index-tracking funds.

Fact – The Eastspring approach begins with a much broader universe than the MSCI Indices, which offers a greater opportunity set to find stocks with lower volatility.

• Our portfolio managers begin by analyzing nearly 3,500 stocks in Asia and 11,000 in the Global portfolio; the MSCI Asia Pacific ex. Japan Index only has approximately 700 stocks while the MSCI All Country World Index only has approximately 2,500 stocks.
• A larger universe allows us to find more low volatility companies and to also skew the portfolio to more mid- and small-cap stocks. Large cap stocks are susceptible to more volatility as most active managers, who manage their portfolios with reference to a market cap index, may be more attuned to focusing on stocks which have larger market caps. Analysts also prioritize research ideas with reference to market caps, causing swings in stock prices when they change their estimates of earnings. Consequently mid-and small-cap stocks tend to exhibit lower volatility.
• The Eastspring low volatility funds have a portfolios of stocks that are more diversified and contain more stocks than a typical actively managed equity fund. This also helps to reduce stock specific risk in the portfolios.

Our Philosophy

We observe that exploitable market inefficiencies exist and persist as a result of entrenched conscious and unconscious behaviours and incentives of market participants. Factors derived from observed fundamental, structural or behavioural effects and validated by rigorous research are key to identifying persistent and reliable drivers of returns. A structured evidence-based research framework with an active and critical challenge focus around results ensures unfounded behavioural biases do not drive strategy development. Additionally, a systematic approach to portfolio implementation ensures efficient and repeatable outcomes. Continual and active challenge of prior beliefs and research is essential to ensuring an investment process adapts appropriately to changing market dynamics.

QSG Investment Process

• Identify factors that allow an exploitable advantage.
• Back test to confirm approach and consistency of outcome.
• Systematically construct robust diversified portfolios.
• Monitor portfolio, performance, risk and integrity of investment process.

Investment Excellence

Guided by on-the-ground expertise of more than 250 investment professionals, we provide investment solutions across a wide range of asset classes including equities, fixed income, global asset allocation and alternatives. Our investment teams are specialists in their respective fields, supported by global resources made available through our relationship with Prudential plc and are committed to acting in the best interests of our clients and delivering optimal investment outcomes over the long term.

Large Footprint in Asia

We are located in 10 major Asian markets plus offices in US and Europe. An unparalleled knowledge of the markets in which we operate allows us to offer unique and tailored investment solutions. We understand Asia’s opportunity is vast; corporate cultures are extremely complex and diverse. Successfully navigating Asian market requires expertise and local knowledge. Our reach and heritage in the region have allowed us to develop a deep familiarity and understanding of Asian fundamentals, both at the sovereign and company level.

The Fund is a sub-fund of Eastspring Investments. Eastspring Investments is an umbrella investment company with variable capital (the “SICAV”), incorporated under the laws of Luxembourg and authorised by the Commission de Surveillance du Secteur Financier (“CSSF”) as a UCITS fund in accordance with EU Directive 2009/65/EC. The Management Company of the SICAV is Eastspring Investments (Luxembourg) S.A., 26 boulevard Royal, L-2449 Luxembourg.