Acadian’s managed volatility team pioneered risk-focused approaches to equity investing over a decade ago, and the team continues to be at the forefront of the development and management of these strategies.With a dedicated team of portfolio managers and research analysts, the continuous support of the broader equity investment team, and extensive data and technological infrastructure, Acadian has steadily refined its low-volatility capability and expanded it to include a number of regional managed volatility implementations.
Attributes & ApproachThe long-term success of low-risk stocks in earning the full equity market premium may be the greatest anomaly in finance, as it challenges the basic notion of a risk-return tradeoff. In studying this phenomenon, Acadian takes a behavioral-finance perspective: we hypothesize individuals’ preferences for lotteries and their well established biases of representativeness and overconfidence lead to demand for high-risk stocks in excess of fundamental justifications. Sophisticated investors, who otherwise would be ready to take the other side of irrational demand, in this case are limited by the high tracking error associated with lower-beta and lower-volatility stocks – with the result that lower-risk stocks are persistently mispriced relative to higher-risk stocks. Taken in combination, these beliefs provide a timeless intuition for a powerful mispricing and a barrier to the arbitrage of the mispricing – two key ingredients of our forward-looking confidence in our approach.
Acadian focuses on lowering total portfolio risk when building Managed Volatility portfolios. This approach emphasizes stocks with low systematic risks (low betas) and is expected to produce an even lower-risk portfolio versus approaches that sort on stocks’ total volatilities. In addition, Acadian includes a persistent exposure to our return (“alpha”) forecasts. This important addition allows us to choose the portfolio with the highest expected return, among candidate low-risk portfolios. Finally, Acadian seeks to protect our clients’ assets against unwanted macroeconomic exposures in the step of portfolio construction. The most attractive stocks in our approach will fulfill all three goals – diversify the market portfolio, increase expected excess return, and maintain a neutral stance versus unwanted risk factors.