This week’s focus is on the construction of portfolios and how we implement satellite components to reduce the overall risk without reducing the expected returns.
One of those ways you can do such, is by introducing risk factors in your portfolio, whether it be momentum, quality or low volatility.
A particular element that I like to introduce especially in an environment where there is uncertainty about inflation, interest rates and geopolitical risk, is one where we focus on minimum volatility stocks and introduce that risk premium into the portfolio.
Now, there are very good providers out there but what I like to go to generally is the Ishare version, but just as a concept. For example, when the screenings have been done, low volatility stocks such as ACB 500, or even the ETFs strategies included in the portfolio, can last 10 odd years. They have participated to the upside on average by 83% at the time and only participated on the downside by 68%.
When you think of low volatility, do not confuse that with a low BETA or a low PE that you are necessarily going to take. Yes, it has to have a lower BETA relative to your existing portfolio otherwise it defeats the purpose.
The current waited average PE of the US minimum volatility ETF is around about 21, which is high. So in relevant to the price to earnings because a stock like for example, Johnson&Johnson could have an exceptional high PE but because it has a stable earnings base and high level of expectations of what the dividends streams are going to be in the next couple of years it might demand a much higher PE.
So introducing factors like low volatility in a portfolio has definitely assisted us. Looking at the top core components within that volatility index, Johnson&Johnson, Vertex and Cisco are also three of the top holdings that we hold in our portfolio. So in a pure bottom-up basis, even this attractive stability in earnings comes to the forefront.
And if you introduce a sort of a passive portfolio with these risk premiums as satellites, that could make a very simple entry-level portfolio for clients that only have less than $25 000.00 to start an offshore global portfolio.
Generally when we do have a portfolio size of about $80 000.00 you can then start doing the full-on stock picks without incurring many transaction fees.
ENDS