Entry Points | Volatility Reduction

With the period of low-interest rates, low inflation, and low volatility seemingly in the rearview mirror, Portfolio Manager Brandon Smith, CFA, CAIA, explains how a value-oriented long/short equity strategy can potentially reduce volatility and create an opportunity for profit by separating the winners from the losers.

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Catalysts in Play: Following a decade in which U.S. equities have compounded at more than 15% annually, with very low volatility, investors seem to have become more focused on return and less focused on risk and downside protection, which could be a costly oversight. 

Entry Points: It appears that the regime of zero interest rates, low inflation, and an ever-expanding Federal Reserve balance sheet, with low equity volatility, is over. We firmly believe that the next 10 years are highly unlikely to resemble the previous decade in global equity markets. Thus, the prospects for long/short equity investing are promising. 

Volatility Reduction to Preserve Capital: Volatility reduction is extremely important, as the laws of mathematics dictate that volatility will eat away at a compound return stream over time. Additionally, volatility can lead to behavioral pitfalls such as loss aversion, causing investors to sell out of equities at inopportune times, further compounding a loss.

Win-by-Not-Losing Approach: A tried-and-true adage holds that if one loses 50% one year, she or he will need to make a return of 100% the next year to break even. In this video, we demonstrate how, with a simple average return of 7% annually, increased volatility leads to lower compound average returns in six different illustrative examples.  

Active Strategy: Value-focused long/short equity strategies can help investors weather periods of high volatility by reducing the loss of capital and creating the potential for profit by separating winners from losers. Disciplined execution of a bottom-up, value-driven investment approach – incorporating both quantitative analysis and fundamental research – can help help investors potentially stay ahead of changing market conditions.

For questions or additional information, please contact us.

Statistics and other information taken from the following sources:

Definitions:

Volatility – In finance, volatility is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility
measures a time series of past market prices.
Federal Reserve – The Federal Reserve System is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal
Reserve Act, after a series of fi nancial panics led to the desire for central control of the monetary system in order to alleviate fi nancial crises.
Compound returns – Compound return is the rate of return that represents the cumulative effect that a series of gains or losses has on an amount of capital over time.
Loss aversion – Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. What distinguishes loss
aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen.

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Index returns are provided for comparison purposes only to show a broad-based index of securities, as the indices do not have costs, fees, or other expenses associated with their performance. In addition, securities held in either index may not be similar to securities held in the firm’s accounts. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data. Past performance is not an indication of future results. This document is not an offering of securities nor is it intended to provide investment advice. It is intended for information purposes only.

The views expressed in this video reflect those of Boston Partners as of the date of this video. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Discussions of market returns and trends are not intended to be a forecast of future events or returns.

Estimates reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

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Jack Birmingham

Product Specialist

4 Years of Investment Experience

4 Years at Boston Partners

Mr. Birmingham holds a B.A. degree in Political Science from Hobart College.

Mr. Birmingham is a Product Specialist for the Boston Partners Value Equity strategies based in the Boston office, responsible for clients, consultants and prospects outside of North America. Prior to this role, Mr. Birmingham joined the firm as an RFP Writer and Database Coordinator in the Marketing Department, where he supported all of the firm’s equity strategies.

Matthew Donovan

Equity Analyst

Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania.

Mr. Donovan is an equity analyst with Boston Partners. Mr. Donovan is focusing his analytical efforts on Emerging Markets equities. Prior to this, he was a Research Analyst for the Boston Partners Sustainability and Engagement Team. He was responsible for original ESG/Sustainability research on companies held in Boston Partners’ portfolios. Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania. He has one year of experience.

John Zhao

Equity Analyst

Mr. Zhao holds a Bachelor of Arts degree from the Richard Ivey School of Business at Western University and an MBA from Harvard Business School. He has six years of industry experience.

Mr. Zhao is an emerging markets industry analyst with Boston Partners specializing in fundamental research of stocks held in our Emerging Markets Equity products. Prior to his role at Boston Partners, Mr. Zhao worked as a Private Equity Associate in Salt Lake City and an Investment Banking Associate in Hong Kong.

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Jonah Frank

Equity Analyst

Mr. Frank was a student at Boston University where he earned a B.S. degree in business administration with a concentration in finance and management information systems.

Mr. Frank is an equity research analyst with Boston Partners. Mr. Frank is focusing his analytical efforts on equities within a variety of cyclical industries.

Edward Stansky

Equity Analyst

Mr. Stansky holds a B.S. degree in economics from Duke University and a M.B.A. from NYU’s Stern School of Business. He has six years of investment experience.

Mr. Stansky is an equity research analyst with Boston Partners and has generalist coverage responsibilities. Prior to this role, he worked as a high yield and leveraged loan analyst at DDJ Capital and as an investment banking analyst in debt advisory at BofA Merrill Lynch.

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Marlon Thompson

Equity Trading Assistant

Mr. Thompson holds a B.S. degree in finance from Boston College. He has ten years of industry experience.

Mr. Thompson is an equity trading assistant for Boston Partners. Prior to assuming this role, he worked as a portfolio operations analyst. Before joining the firm, Mr. Thompson held several roles including Vice President of Operations at Benefit Street Partners LLC and positions at International Fund Services (IFS) and Pioneer Investments.

Kara Pattipati, CFA

Relationship Manager

Ms. Pattipati holds an M.A. in International Relations from the University of St. Andrews. She holds the Chartered Financial Analyst® designation. Ms. Pattipati has ten years of industry experience.

Ms. Pattipati is a member of the Relationship Management team at Boston Partners. She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining Boston Partners in 2016, she was a business development associate at Geode Capital Management.

Elizabeth Sheerin

Relationship Manager

Ms. Sheerin holds a B.S. degree in business management from Babson College. Ms. Sheerin has thirteen years of industry experience

Ms. Sheerin is a member of the Relationship Management team at Boston Partners and she joined this team in 2011.  She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining our firm, she was a Client Service Representative at Putnam Investments. She also held several financial services related internships including working for Merrill Lynch Global Wealth Management and State Street Global Advisors.

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