Less Volatility, More Action | BetaShares

Less Volatility, More Action

BY BetaShares ETFs | 3 May 2016


I am trying to carefully build a nest egg.

I understand I need to be at least partially invested in a diversified portfolio of stocks, but I find the level of volatility… uncomfortable.  I’d like to at least reduce the level of volatility a bit, even if it means giving up a bit of return.

Also, I’d prefer my fund to get in and get out of stocks over time as things get bumpy or look brighter, rather than just set-and-forget through thick and thin.  If the manager expects the markets to go down then I’d prefer to have them step away until that passes, rather than be forced to always be fully invested.

Is there anything out there for me?


Less Volatility, More Action



You mention investing in a diversified portfolio of stocks as a starting point – diversification is often touted as the only free lunch in investing and is a great starting point for an investment portfolio, domestic or global.

A desire for lower volatility and tactical asset allocation (moving in and out of the market) is something deemed more and more important by investors since the GFC.

BetaShares recently launched the ‘Managed Risk’ series of Funds to address these issues.  In a nutshell, the funds gain exposure to a diversified portfolio shares while using a risk management overlay seeking to reduce volatility and cushion downside risk.

I’ll discuss the BetaShares Managed Risk Australian Share Fund (managed fund) (ASX ticker: AUST) to explain how this works.  The BetaShares Managed Risk Global Share Fund (managed fund) (ASX ticker: WRLD) is a natural extension of this and we can sum-up by highlighting differences between the two.

Firstly, diversification – AUST achieves a diversified portfolio by passively investing in around 200 of the largest stocks in Australia.

The differentiating feature of this product is the risk management overlay, so I’ll devote some time to explaining this.

Risk Management Overlay

A risk management overlay is used for the dual objectives of reducing volatility and defending against loses in declining markets.

The risk management strategy manages equity exposure.  The extent of the risk management position varies over time and is based on existing and historical volatility of the share portfolio.  Generally, in periods of higher volatility the Fund’s exposure to the sharemarket is reduced – with the aim of lowering the fund’s volatility and providing some downside protection.  A handbrake of sorts.

Typically the risk management position, which offsets the stock exposure, is expected to be in the range 10-50% and will not exceed 70%.  So it is possible that at the limits of very high current and/or historical levels of volatility, up to 70% of the stock exposure may be neutralized ie. the fund may  be only 30% exposed to stocks.

Generally, the fund will have a 10%-50% handbrake applied, which aims to help stem losses which result from participating in declining markets.  The flip side of this is that, to the extent that ‘the handbrake is on’ the fund will not be expected to participate fully in a market rise, just like it won’t be expected to participate fully in the downside.

However, the risk management overlay should have the effect of reducing volatility in portfolio value.

This risk management overlay is implemented by selling equity index futures contracts (ie. ASX SPI 200 futures) which offset the exposure of the share portfolio within the boundaries above.  I’ll be writing a piece on how futures work in the near future.

The Australian focussed BetaShares Managed Risk Australian Share Fund is complemented by the globally focussed BetaShares Managed Risk Global Share Fund (ASX Ticker: WRLD).  WRLD uses exactly the same strategy, but on a global universe of stocks.

The underlying equity portfolio of WRLD is a passively invested exposure to around 1,500 global stocks, rather than AUST’s 200 Australian stocks.  WRLD also uses an active risk management overlay which aims to reduce equity exposure in times of high and or rising volatility.  While AUST uses the ASX 200 index futures to manage equity exposure, WRLD uses a global portfolio of futures contracts that offset the return of the S&P 500, Japanese Topix, UK FTSE and European stocks. One small difference is that WRLD actually allows the risk management position to potentially reach 100% (rather than a maximum position of 70% that is used by AUST).

The BetaShares Risk Managed Share Fund series is a good solution for investors seeking to gain diversified equity exposure with lower levels of volatility and a dynamic risk overlay with the potential to provide some downside protection in times of heightened volatility.

For more information read about AUST and WRLD here.

If you have any questions, or symptoms persist, please feel free to contact me via the comments section below.

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