Your portfolio handbrake in volatile markets | BetaShares Insights

AUST, WRLD and HVST – a portfolio handbrake in volatile markets

BY Blair Modica | 8 April 2020
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AUST, WRLD and HVST – your portfolio handbrake in volatile markets

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Given current sharemarket instability, we have received a number of questions regarding risk management and how to reduce portfolio volatility in times of market distress. Many of our investors have constructed well-balanced portfolios which incorporate fixed income as a counterweight to equities, but still would like an element of risk management for the equities component of their portfolio.

Traditionally, institutional-quality risk management strategies have been difficult or expensive to access and manage – not ideal for SMSF, pre-retiree or retiree investors who are looking to protect their nest egg but want to avoid esoteric strategies which are costly and hard to enable.

These investors are currently facing the dual challenges of historically low interest rates, which in turn make less risky assets like cash unattractive when trying to sustain themselves through retirement, and heightened market volatility, which can erode years of retirement savings in a matter of weeks. The issue therefore becomes finding an investment which allows share market participation (including dividends and franking credits) with a risk management system which aims to provide protection when the market draws down.

Managed Risk Strategies: Equities exposure that dials down risk

The BetaShares Managed Risk Australian Share Fund (managed fund) (ASX: AUST) and BetaShares Managed Risk Global Share Fund (managed fund) (ASX code: WRLD) allow investors who are looking to maintain exposure to equities (and the income associated with them) to mitigate the risk of market volatility and large drawdowns during periods of declining markets.

The risk management strategy utilised by the BetaShares Managed Risk Series acknowledges that equity markers are not a ‘straight road’, with volatility in the market creating many ‘bends and turns’1.

In order to combat volatility issues, and to provide a smoother investment ride, the strategy involves monitoring the volatility of equities daily. If volatility rises beyond normal levels, a ‘handbrake’ is applied and market exposure is reduced by selling relevant futures contracts – this allows the fund to stabilise the volatility of the portfolio around a target level and reduce the downside exposure of the portfolio during periods of significant market declines.

Recent Market Performance: (Chart 1) S&P/ASX 200 Accumulation Index v Betashares Managed Risk Australian Share Fund (managed fund) (AUST), 31 Dec 2019 – 31 March 2020 (Indexed to 100)

asx 200 accumulation v AUST

Source: BetaShares, Milliman, Bloomberg. Past performance is not an indicator of future performance. See BetaShares website for longer term performance.

(Chart 2) MSCI World Index (AUD) v Betashares Managed Risk Global Share Fund (managed fund) (WRLD), 31 Dec 2019 – 31 March 2020 (Indexed to 100)

(Chart 2) MSCI World Index (AUD) v Betashares Managed Risk Global Share Fund (WRLD), 31 Dec 2019 – 31 March 2020 (Indexed to 100)

Source: BetaShares, Milliman, Bloomberg. Past performance is not an indicator of future performance. See BetaShares website for longer term performance.

As the charts above show, the wider market has experienced significant falls over the past month or so, and volatility has sharply increased.

In Chart 1, we track the S&P/ASX 200 Accumulation Index vs AUST. From 31 December 2019 to 31 March 2020 the Index returned -23.1% whereas AUST returned -12.8%. Furthermore, the volatility of AUST was 18.1% compared to 47.5% for the Index.

The Fund’s performance over this period shows that the risk management strategy partially sheltered investors from the significantly larger drawdown experienced by the wider market. Evidently, the strategy has provided a handbrake for investors, and smoothed market volatility.

Likewise, WRLD outperformed the MSCI World Total Return Index over the same timeframe (Chart 2). The MSCI World Index returned -9.3%, while WRLD returned -5.8%, with significantly lower volatility. This outperformance is again down to the risk management strategy protecting investors from the large drawdown in the wider market.

It should be noted that, while the handbrake level will be lifted in periods of rising share markets so that the Funds have an opportunity to rise in value, they should not be expected to go up by the same amount as the increase in the underlying share market.

Another fund that implements a risk management overlay is the BetaShares Australian Dividend Harvester Fund (managed fund) (HVST). Over the three months from 31 December 2019 to 31 March 2020, HVST (-10.3%) outperformed the S&P/ASX 200 Accumulation Index (-23.1%) by 12.8%. The volatility of the fund was 17.8% compared to the ASX 200 at 47.5%, due to the risk management overlay. Chart 3 outlines the performance of HVST against the wider Australian sharemarket.

(Chart 3) S&P/ASX 200 Accumulation Index v BetaShares Australian Dividend Harvester Fund (managed fund) (HVST), 31 Dec 2019 – 31 March 2020 (Indexed to 100)

net equity v hvst v asx 200 accumulation index

Source: BetaShares, Milliman, Bloomberg. Past performance is not an indicator of future performance. See BetaShares website for longer term performance.

In summary, the BetaShares Risk Management series enacts a ‘handbrake’ when market volatility increases. Over the long term, this allows investors to ‘smooth the ride’ whilst still collecting dividends and franking credits – particularly beneficial for SMSF, pre-retiree and retiree investors who may want to retain exposure to equities, but who seek to limit the potential damage to their savings in times of heightened market volatility.

Note: AUST, WRLD and HVST do not aim to track published benchmarks.

4 Comments

  1. ron Porto  |  April 8, 2020

    Hi Blair. I currently hold hvst and a number of other etfs with you. Looking at the history of hvst, I noticed that the price has been on a steady decline for quite some time. Could you please explain why this is the case. I seem to be going backwards.
    Kind regards
    Ron

    1. Benjamin Smith  |  April 9, 2020

      Hi Ron,

      Thanks for reaching out.

      The reason why the capital value of the fund has declined is that the distribution payments of the fund has exceeded the growth of the underlying portfolio of shares. It is the case that once a firm has gone ‘ex-dividend’, the stock price will decline by an amount roughly equal to the dividend paid. HVST rotation strategy sells these stocks following the ex-dividend date, meaning stocks are often sold at a capital loss. Additionally, a number of high dividend yielding stocks (e.g. the big four banks) performed poorly in 2019, adding to capital decline.

      This capital erosion can be managed through a fully flexible dividend reinvestment program (DRP) whereby any distributions are reinvested back into the fund.

      Sincerely,

      BetaShares Client Services Team

  2. Sailosi Kato Soqo  |  April 8, 2020

    Thank you are doing great service

  3. Jarrod  |  April 9, 2020

    Fantastic article, thank you to the author. Both AUST and WRLD would be the perfect risk-mitigator for my portfolio during these uncertain times. I wish i had a handbrake on my equities a couple of weeks ago! Cheers.

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