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Takeaways from the FMAP Convention: Reducing Equity Beta – Managed Volatility Approach

by Charlton Sean D. Gaerlan II


Mark Hui from State Street Global Advisers discussed the advantages of a reduced equity beta of managed portfolios. Historically, high volatility stocks have not been compensated with higher returns, and lower beta stocks have actually performed better than expected. As a result of taking on additional risk, it has been shown that most portfolio managers could not consistently outperform their respective benchmarks. Thus, expected return per unit of expected risk is not optimized.


Managed volatility portfolios have been increasingly appealing over the past few years due to its potential to improve return-risk efficiencies of a portfolio. Due their to lower beta and lower correlations with benchmark indices, these types of portfolios provide diversification benefits to investors. As managed volatility portfolios offer downside protection, they tend to outperform the market during market declines. However, going long on such portfolios comes at a cost as gains are trimmed during bull markets. Nonetheless, the reduced volatility of the portfolio allows it to have consistent risk/reward profiles over time, making it attractive for investors such as pension funds and insurance companies.

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