- This is a continuation from Part One of the article, discussing about the Low Volatility strategy and how investors may delve into it. Part One can be found here.
- In Part Two, we will focus on the Eastspring Investments – Asian Low Volatility Equity Fund, a fund that specialises in the low volatility strategy within the Asia Pacific Ex Japan region, and why we think it is a good investment at this juncture.
The previous article discussed the merits of the Low Volatility strategy, and its superior risk-adjusted performance relative to peer strategies since 1988, the year index data for Asia Pacific Ex Japan became available.
The resurgence of volatility was also touched on, as we reminded investors about the calm market anomaly in 2017, which is unlikely to repeat anytime soon. Chart 1 details the calendar returns and drawdowns of the MSCI Asia ex Japan markets since 1988. We would like to point out that February’s drawdown has already exceeded the one experienced in 2017, and we believe it is a taste of what we can expect moving forward.
We also highlighted our preference for investing in the Asia Pacific ex Japan markets, due to its relatively inexpensive valuations, long term growth prospects and wider investment universe, which makes it an ideal candidate to implement the Low Volatility investment strategy.
In this piece we will discuss further about the selected fund’s investment process, characteristics, and performance numbers. Going into the latter stages of the market cycle, a low volatility strategy will increasingly grow in importance, which we believe can help investors find balance in shaky markets.
Chart 1: Calendar Returns & Intra-year Decline of MSCI AC Asia ex Japan since 1988
One Fund To Implement The Low Volatility Strategy
The Eastspring Investments – Asian Low Volatility Fund is one of the rare Asian equity funds that specialises in the Low Volatility equity strategy. Although officially incepted on October 2016, the fund manager is not new to the game, as it has been managing the fund since 2013 for non-retail investors. Primarily focused on the Asia Pacific ex Japan region, the fund aims to provide investors a combination of income and capital appreciation at a lower volatility than its peers.
Investment Process
Although benchmarked to the MSCI AC Asia Pacific ex Japan Index Minimum Volatility Index, the investment team screens ~3,500 stocks identified from the S&P Broad Market Index (BMI), a universe 4.7x larger than the benchmark, allowing the team to search deep for hidden opportunities.
Next, the team distils the investment universe based on market capitalisation and liquidity, as small and illiquid stocks may be difficult and costly to implement. The initial set of filter will trim the investible companies down to approximately 1,000 stocks. The second set of filter will be to prioritise companies with above average dividend yields, and stronger bottom-up fundamentals.
Companies with quality factors (e.g. lower leverage) are taken into consideration, and the team avoids those that are expensively valued, or have poor analyst sentiment. At the end of the filtering process, the team would be left with ~300 stocks for consideration into the portfolio. Lastly, the investment team runs its proprietary portfolio optimiser software to simulate various portfolio iterations that are optimised for the lowest volatility.
To ensure that the portfolio will be efficiently diversified, the team also conditions the simulations by placing limits on cash (~1%), portfolio size (~100 stocks) and restrictions on sector and country allocations. On a daily basis, the portfolio is monitored for risk control and rebalancing opportunities.
Lowering Portfolio Risk Through Diversification
Rather than nit-picking at individual stock volatility, the fund has a greater interest in managing volatility from a portfolio perspective, since the real risk lies in a portfolio of highly correlated securities, which diminishes the benefits of diversification. Hence, investors should not be shocked to see volatile sectors such as Financials and Industrials included in the portfolio, as the portfolio is optimised to reduce overall portfolio risks.
Low Volatility Is Not Always Boring
The resultant is a portfolio mix that is an underweight to areas with rich valuations (Information Technology), and overweight to the defensive and less volatile sectors like Telecommunications and Utilities (see Chart 2). Nonetheless, a low volatility strategy does not mean the fund is only limited to investing in “unexciting” industries, as seen from its significant exposure to sectors (Financials, Industrials and Materials) that will benefit cyclically from a rising interest rate environment.
Chart 2: Fund Versus Benchmark Allocation
Attractive And Sustainable Dividends
Regular dividend issuance is also one of the fund’s main features. Besides capital appreciation, the fund has been able to issue dividends of 4% p.a. to investors since launch. Compared to yields offered by investment grade credits, the fund’s current dividend policy appears to be attractive, offering a investors a yield premium over other global sovereign bonds (see Chart 3). Unlike bonds, whose yield to maturity are calculated based on the price investors bought-in at, equity dividend pay outs have the potential to appreciate given the growth in corporate earnings as the economy expands.
Chart 3: Fund’s Equity Yield Versus Global IG Bond Yields
Don't Let 2017's Performance Fool You
We compared the performance of Eastspring Investments – Asian Low Volatility to its equity peers within the Asia Pacific ex Japan universe available on our platform. The fund’s underperformance was largely expected, given that the previous year was a poor environment (lack of volatility in the market) for the low volatility strategy (see Chart 4), along with a weakness in value and dividend yield factors, which are the key investment themes for this fund.
Chart 4: Fund Performance Versus Similar Funds
Table 1: Funds’ Performance Metrics
| Fund | China Stock Market Peak To Trough (June 5 - July 12 2018) | Total Returns (since inception) | Returns YTD (1 Jan - 27 July 2018) | Downside volatility (annualised) |
| Eastspring Investments - Asian Low Volatility Fund | -3.4% | 10.8% | 0.5% | 8.0% |
| Schroder Asian Equity Yield Fund | -4.6% | 15.8% | -1.5% | 9.5% |
| First State Dividend Advantage | -4.4% | 28.2% | 3.8% | 9.3% |
| BlackRock Asia Pac Equity Income> | -6.9% | 13.4% | -5.0% | 10.6% |
| LionGlobal Asia Pacific Equity Fund | -8.1% | 21.7% | -2.6% | 12.5% |
| Aberdeen Pacific Equity Fund | -5.9% | 19.9% | -1.5% | 9.5% |
| Nikko AM Shenton Asia Pacific Equity Fund | -6.8% | 16.6% | -5.2% | 10.8% |
Source: Bloomberg, iFAST Compilations |
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Before casting their judgment on the fund’s total returns since inception, investors should consider if investing is a marathon or a 100 metres race sprint. Considering the one-off nature of 2017’s volatility numbers, it would not be fair to judge the fund performance based on that, given the fund’s admirable performance in the current volatile market environment.
With interest rates continuing on its path of ascension, we believe the factors forming the cruxes of the fund’s strategy will eventually outperform as markets become more value and risk conscious moving forward.
As forward looking investors, we should always ponder on how we can position our portfolios moving forward, and certainly, the fund’s low volatility strategy and conservative approach is one that is well positioned to perform well in volatile markets.
Which Investor Is This Fund Suited For?
It should be noted that is unlikely to appeal to investors looking for a racy growth portfolio as the fund is not set up to chase high beta returns. The main priorities of the fund are to achieve low portfolio volatility and superior risk-adjusted returns.
For someone who is risk-averse, Eastspring Investments – Asian Low Volatility Equity Fund should definitely be on your investment radar, as we expect the fund to have less downside volatility and drawdown than its peers. Relative to its peer group, fund performance in 2018 should turn out better than the previous year.
Income seeking investors may also consider the fund, since it provides an option to receive monthly dividends. It would also be appropriate for anybody interested in a stable and measured approach to building their nest egg over the long term.
Even if you are someone who does not fit the above risk profiles, it would still be a sensible choice to allocate some of your core equity portfolio allocation to the Eastspring Investments – Asian Low Volatility Fund to serve as a cushion for the ebbs and flows of Asian equity markets.
Have Questions?
If you have any questions with regards to the fund, or are interested in finding out what type of investment strategy fits your risk profile, please feel free to approach any of our friendly Investment Advisors to assist you.
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