Equities Low Volatility - winning by not losing

08.11.2018

October was a very turbulent month in the global equity market and ended with the largest negative return measured in local currency since Jyske Capital launched its Equities Low Volatility strategy almost five years ago. We have on several occasions emphasized that investors in the strategy should expect a better protection of wealth in down markets compared to the global equity market. This is the consequence of the lower risk for the strategy, including lower standard deviation, lower beta and higher exposure to defensive sectors.

It is thus very satisfying that the strategy fell only 1.32% in October against a decline of 5.13% for the global equity market, equivalent to an active return of 3.80 percentage points. Around ¼ of the active return can be attributed to a positive contribution from the sector allocation, in particular higher exposure to utilities and consumer staples (the sectors with the highest returns for the month) and lower exposure to consumer discretionary (the sector with the lowest return). Around ¾ of the active return originate from the equity selection with a positive contribution from all 11 sectors. More than 40% of the holdings – more precisely 43 equities – in the strategy achieved a positive absolute return in October, illustrating the very broad-based nature of the active return.

Since inception of the strategy, there have been 18 months with a negative return in the global equity market. In these months, the strategy has achieved an average active return of 0.85 percentage point, corresponding to a downside capture ratio of 0.48. This means that the strategy has historically declined by less than half the decline in the global equity market in down markets. Similarly, there have been 40 months with a positive return in the global equity market. Here, the strategy has had an average active return of -0.18 percentage point, equivalent to an upside capture ratio of 0.90. This means that the strategy has historically been able to capture 90% of the increase for the global equity market in up markets. In other words, the strategy wins by not losing as much as the global equity market in down markets. This is the reason why the strategy since its inception in December 2013 has been able to generate a return of approximately 76%, equivalent to an active return of more than 14 percentage points compared to the global equity market.