Managing Volatility In Unstable Markets
Advisors have been telling clients for years that they should focus on a strategy that aims to maximize returns over the long run in spite of ups and downs along the way. But many advisors have begun to question that conventional wisdom.
"The reality is, that's not the only approach, nor is it the best one in many markets," says Barry A. Ransick, a principal at Principled Wealth Advisors in Covington, Ky. "By managing volatility, rather than blindly accepting it, our clients can get more comfortable with their investment approach and may be better positioned for success."
How are advisors attempting to manage volatility? Some are turning to managed volatility funds. Some of these funds look to hold the least volatile investments. Others do that but also employ hedges to minimize volatility. Exchange-traded products tied to the VIX, a well-known volatility measure, also have been gaining in popularity. Strategies that manage volatility are supposed to allow individuals to capture most of the market upside, but with reduced market volatility and more short-term stability in the current topsy-turvy financial market.
"Managed volatility funds are gaining interest among investment managers," says Cory Haith, financial advisor for West Des Moines, Iowa-based Syverson Strege & Co. She says the funds offer low price volatility and include the stock of companies that tend to generate stable earnings and dividends throughout all business cycles.
Syverson Strege & Co. currently uses managed volatility funds in its more conservative client investment models, Haith says. "Generally, we allocate approximately 10% to 15% to such vehicles."
Ransick says more of his clients are asking for income stock investments with low to moderate risk. "Investors, I think, are getting more in tune to the investment lingo," Ransick says. "The average investor today really knows what we mean when we say 'managed volatility.' If you had said it four to five years ago, they would have said, 'What are you talking about?' Today, investors understand that concept of volatility that the markets are having."
Ransick recalls meeting with a widow in her early 50s last month who had been left with an ample nest egg but was leery of making any investments. He says they talked about needing to get into stocks for her long-term security and that they would use a 'managed volatility' investment strategy.
"I think this gave her the comfort to be in equities, that she wouldn't likely have taken had we not been able to talk about something specific, than just, 'Gee, we're just going to buy [stock] in this large U.S. company.'''
Oaks, Pa.-based investment manager SEI offers clients the ability to adopt a managed volatility strategy through some of its products, including its U.S. Managed Volatility Fund.
The fund invests in stocks with lower-than-average volatility and is designed to produce long-term returns comparable to the market, with less volatility and risk of loss. Year-to-date, the fund has outperformed the S&P 500 index by nearly 7%, says Kevin Crowe, head of product development for the SEI Advisor Network.