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Investment Perspectives May 15, 2019

Managed volatility strategies

Mitigating downside risk can lead to capturing stronger returns.

At Securian Asset Management (AM), we believe that financial markets, particularly equity markets, regularly cycle through periodic episodes of normal risk and volatility, and other periods of high levels of risk and volatility.

We readily admit that the definitions of normal, and elevated will vary among investors. These periods, or volatility episodes, tend to demonstrate an element of persistence.

While countless factors contribute to the initiation and persistence of these episodes — factors ranging from government policy, geopolitical risks, economic conditions and others — we believe investors would logically prefer to avoid periods of high volatility, particularly those periods when downside risk (or drawdown) is most pronounced.

Importantly, episodes of high volatility tend to lead to unfavorable risk asset performance while episodes of low volatility tend to produce better performance profiles for risky asset classes.

At Securian AM, we believe that a managed volatility investment approach allows investors to use prevailing and prospective episodes of volatility, dependent upon a manager’s ability to forecast volatility, to employ a rules-based approach to asset allocation between a risky asset (equities) and a less-risky asset (bonds or cash).

Mitigating downside capture

We acknowledge that achieving favorable long-term returns requires accepting certain risks. We do not believe that risk is constant, and therefore, we would seek to improve portfolio risk-return attributes by adjusting asset class exposures when levels of risk across asset classes vary.

To assume that we can enhance a portfolio’s risk-return characteristics throughout time by forecasting levels of risk and adjusting relative asset class exposures accordingly, we must rely upon specific and identifiable characteristics of equity market volatility including:

  • Volatility episodes, whether high or normal, tend to exhibit persistence
  • High volatility episodes tend to mean revert
  • Normal volatility episodes tend to occur most frequently
  • Periods of high volatility tend to produce negative returns and lower Sharpe ratios

A managed volatility approach: customizable, rules-based and transparent

We believe it is imperative to have considerable flexibility to meet the specific volatility and drawdown preferences of institutional investors.

Managed volatility infographic

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The investment characteristics presented herein for each composite are subject to change. Investing involves many inherent risks, including the potential loss of the entire investment. Opinions expressed herein are those of Securian AM only, and only as of the date indicated. To receive a complete list and description of Securian AM composites, contact us at (800) 665-6005. If you have met with a Securian AM representative or are on our annual GIPS® mailing list, please refer to the GIPS®-compliant presentation which you have received within the last twelve months.

The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, Securian AM does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Securian AM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated.

This material may not be reproduced or distributed without the written permission of Securian Asset Management, Inc.

Securian Asset Management, Inc. is a subsidiary of Securian Financial Group, Inc.

For Institutional Investment Use Only.

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