Psst…meet the Steve Kerr of Low Volatility

Ryan Poirier, CFA, FRM | Director, Index and Product Research | ryan@saltfinancial.com



One year ago, the Salt Low truBeta™ US Market Index joined the fight against volatility. [1] The team is already stacked with players like the MSCI USA Minimum Volatility Index and S&P 500 Low Volatility Index–the Michael Jordan and Scottie Pippen of the space. They command the spotlight and are titans with respect to AUM tracking their respective strategies.

The ’95-’96 Chicago Bulls were great in many regards. Jordan led the show without a doubt. However, people often forget about the supporting cast that pushed them over the top. Steve Kerr ranked second in 3-point field goal percentage and led the league in assists-to-turnover. He played side by side with two legends, showing the ability to be effective at the highest professional level. Yet his effectiveness was derived from a differentiated approach to scoring, rebounding, or passing.

The Salt Low truBeta™ US Market Index is the Steve Kerr to the strategies from MSCI and S&P. It has the same championship aspirations in terms of lower volatility. It has the same potential to score points, with volatility over the past year of just 11.58% compared to 16% for the S&P 500 and 12.15% and 11.59% for the MSCI and S&P flavors, respectively. [2] But it provides a differentiated way to implement a low volatility strategy to seek outperformance.

Energy, Health Care, and Real Estate were the three sectors with the highest return contribution for the Salt Low truBeta™ Index over the past year. Utilities and Real Estate led the charge for both MSCI and S&P’s low-vol indices with Consumer Discretionary and Financials rounding out the podium, respectively.

Three Most Impactful Sectors Over The Past Year

LSLT-Best-Sectors

Source: Salt Financial.

S&P’s index was driven by two persistent sector overweights–Utilities and Real Estate. These sectors traditionally perform well when interest rates fall, playing to their bond-like characteristics. The 10-Year Treasury yield was hovering around 3.25% a year ago and has since fallen to 1.7%, with potentially another rate cut in the final quarter of 2019. [3]

MSCI’s index methodology employs a holistic approach when targeting a minimum volatility portfolio. Securities with relatively higher volatility may be included if they zig while others are zagging. Combined with sector constraints, this makes outsized return contributions rarer than in S&P’s version.

The entire NBA was on high alert when Jordan and Pippen came to town. But with all the attention on the two stars, opportunities opened up for other players to step up and perform. The same could be said for Utilities and Real Estate soaking up all the attention in a falling interest rate environment—other sectors have the potential to step in and score points.

In the first quarter, Binky Chadha, Deutsche Bank’s chief strategist, noted that “consumer staples are a preferred tactical play now because other defensive sectors like real estate investment trusts and utilities have already priced in the drop in rates”. [4] With the spotlight fully on Utilities and Real Estate, a low volatility strategy with differentiated sector exposure may be a recipe for success–much like Steve Kerr added a different threat when the big guns for the Bulls were having an off day.

The Salt Low truBeta™ US Market Index is heavily overweight in Consumer Staples. Its allocation is twice that of the MSCI or S&P version. Utilities and Real Estate are also well represented in the index but with a third less weight compared to the S&P version. The MSCI strategy is also tilted towards these more defensive sectors but uses a sector constraint mechanism to keep its allocation closer to the broader market. The Salt index strikes a balance between the two approaches, allowing for more concentration than the broader market but placing an ultimate cap of no more than 30% in any one sector.

LSLT-Sector-Allocation

Source: Salt Financial. Sector classification follows GICS.

Most investors are familiar with the relationship between traditional bond-like sectors such as Utilities and Real Estate and interest rates. Ultimately, this potential crowding into a well-known tailwind effect may open up the court for another option on the team, much like the ’95-’96 bulls and Steve Kerr. He added a different flavor to the team while competing at the highest level, much like the Salt Low truBeta™ US Market Index in the low volatility space.



[1] The Salt Low truBeta™ US Market Index has an inception date of 10/23/2018.

[2] Bloomberg.

[3] https://www.nytimes.com/2019/09/18/business/economy/fed-interest-rate-cut.html

[4] https://www.cnbc.com/2019/03/27/these-stocks-are-seen-as-a-good-bet-when-interest-rates-fall.html


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