No Big Deal

Kreighton and I often wake up reading an inbox full of articles from Seeking Alpha.  It’s a great way to stay current via an independent source of authors not affiliated with the big media outlets.  We especially like a news list of articles exclusively written by those who have the CFA designation (as do both of us).

Craig Lazzara, the Global Head of Index Investment Strategy for S&P and also a CFA Charterholder, hit the nail on the head particularly well for us today.
While what S&P says shouldn’t always be gospel, we often find ourselves in meetings with clients expressing what Craig discusses in his article.

We all learn in elementary finance that volatility can reduce returns.
If you lose 50% and then make 50%, your compound return is -25%; if you lose 10% and then make 10%, your compound loss is only -1%.
Other things equal, lowering volatility can raise returns over time.
October is a fine example of that principle in action.

His main point is that managing returns for the downside allows the upside to take care of itself.  No good hedge is a perfect one but there are ways to participate in the upside while limiting losses when markets head south.

Craig suggests 1) high dividend, 2) low volatility beta, or 3) long beta with some optionality (long VIX) all implemented with ETFs.
While S&P is selling each of these and therefore has a vested interest, we actually don’t disagree.  We prefer methods 2 and 3.

At KilterHowling we achieve this tug-n-pull between risk and return several ways:

Include a variety of investment styles or sources of alpha:  ranging from value to tactical orientated solutions;
No benchmark foisted on the portfolio: in our experience restraining a portfolio’s asset allocation is a death knell for performance;
Use passive investment options when  a better active one isn’t available.
Thanks for reading!