In 2007, Amundi deployed the Minimum Variance strategy for its first client. The following summer, equities collapsed. The client, naturally, was happy to have survived the rout. “It was fantastic market timing,” says Melchior Dechelette.
But Dechelette is more interested in creating resilient equity strategies than predicting market direction. Two years before the crash, he had challenged himself to improve on tracking bubble prone benchmark indices whose degrading Sharpe Ratios proved their inefficiency. How though? Equal weighting, the traditional response, reduces bubble risk but leaves the portfolio concentrated by sector and style. The team focused on efficiency instead, eschewing benchmarking and tracking error for an improved Sharpe Ratio on their European equities universe. Although equities look highly correlated, they are not perfectly so, and the team was able to exploit that. “We found applying the old Markowitz idea of risk diversification very interesting,” says Dechelette. By using diversification to reduce overall portfolio volatility by -30%, the team was able to increase the Sharpe Ratio by 30-40%.
Emphasis on risk reduction is absolute. Minimum Variance portfolios are invested in low volatility stocks combined to benefit as much as possible from their diversification. As such, Minimum Variance exhibits the highest level of risk reduction against traditional indices in Amundi’s Next Gen¹ range of return-smoothing strategies.
Minimum Variance is not a bear strategy.
Minimum Variance strategy outperforms better in normal market conditions than it does in a crash. Overall, the strategy – Europe Minimum Variance – has outperformed the MSCI Europe by an average 5% pa and by 30% since inception in December 2007. Over the three years to end January 2013, it has returned 65.2% against MSCI Europe’s 58.6% with a volatility of 7.8% (vs. 13.1%)².
Minimum variance not a passive concept. The first step in the portfolio construction process is to screen Europe’s 700 names for those whose leverage, income and cash flow do not reveal solid balance sheets. Step two entails estimating stock risk on sector, country and style dimensions. The third, and a key differentiator of Amundi’s investment process, involves mitigating model risk to reduce potential drawdown before finalising the portfolio of around 60-80 stocks.
Intra-asset diversification, the only free lunch? Markowitz famously said diversification was the only free lunch in finance. So far, most of those in the lunch queue are capital constrained managers, incentivised to remain close to their benchmark for Information Ratio constraints, and therefore are unable to achieve true diversification benefits (Sharpe ratio objective). “The current market conditions should encourage investors to look for diversification inside the equity asset class itself. Our Minimum Variance approach can help investors improve their Sharpe ratio in a context where portfolio risks have fundamentally increased.” Outsmarting the benchmarks’ Sharpe Ratio may then become a staple.
1.Next Gen equity strategies includemaximumdiversification, risk parity (SMART approach),option-based asymmetric equities,anti-benchmark strategies andminimumvariance.Next Gen AUM:
€1.2bn at end August 2012.Minimum variance strategy AUM: €340m on European and Global universe, Sept 2012.
2. Source:Amundi Gross performance in EUR as at end-December 2012. Performance presented in compliance with the Global Investment Performance Standards (GIPS®).Amundi's claim of compliance with GIPS® for the period from January 1st, 1994 through December 31, 2011 has been verified by independent auditors.The verification report is available upon request.
This document is solely for the attention of a “Professional” investor as defined in European Directive 2004/39/EC dated 21 April 2004 on markets in financial instruments (“MIFID”) or as the case may be in each local regulations and,as far as the offering in Switzerland is concerned,a“Qualified Investor”within themeaning of the provisions of the Swiss legislation and regulation. In no event may this material be distributed in the European Union to non “Professional” investors as defined in the MIFID or in each local regulation, or in Switzerland to investors who do not comply with the definition of “qualified investors”.This document does not constitute an offer to buy nor a solicitation to sell in any country where it might be considered as unlawful, nor does it constitute public advertising or investment advice.The information contained in this document is deemed accurate as at March 2013.
This material,which is not a contract, is based on sources that Amundi considers to be reliable.Data, opinions and estimates may be changed without notice.Amundi accepts no liability whatsoever,whether direct or indirect, that may arise from the use of information contained in this material.Amundi can in no way be held responsible for any decision or investment made on the basis of information contained in thismaterial. Investment involves risk.Past performances and simulations based on these,do not guarantee future results,nor are they reliable indicators of futures performances.The information contained in this document is deemed accurate as at March 2013.Amundi, French joint stock company (“Société Anonyme”) with a registered capital of € 584 710 755 and approved by the French Securities Regulator (Autorité des Marchés Financiers-AMF) under number GP 04000036 as a portfolio management company, 90 boulevard Pasteur - 75015 Paris - France - 437 574 452 RCS Paris.
Amundi,French joint stock company (“Société Anonyme”) with a registered capital of € 584 710 755 and approved by the French Securities Regulator (Autorité desMarchés Financiers-AMF) under number GP 04000036 as a portfolio management company, 90 boulevard Pasteur - 75015 Paris - France - 437 574 452 RCS Paris