SMSF trustees were turning to low-volatility stocks to complement the large caps in their portfolios, particularly as continued volatility was expected in the next year, according to investment manager AllianceBernstein (AB).
To date, between 30 per cent and 40 per cent of flows into the AB Managed Volatility Equities Fund were from advisers recommending the fund to their SMSFs, AB Australian equities chief investment officer Roy Maslen told selfmanagedsuper.
“In terms of why SMSFs are interested in this kind of [strategy], two things stand out,” Maslen said.
“One is that markets have been really volatile recently and that’s made investors anxious – whether they’re retirees who are more exposed to drawdowns or people planning retirement who don’t want to delay their retirement or just people who are saving.
“So the volatility has spiked a lot of interest in funds that are specifically aimed at providing some reduction in volatility.”
He said the second issue was that SMSFs typically within Australian equities were more focused on large caps, the banks in particular, and to some extent resources.
“Both sectors in their nature are quite cyclical and have been particularly volatile in recent times, so advisers really see the merit of complementing some of those stocks that they are very familiar with and like, with something that’s very different,” he said.
“So we find our fund is quite complementary to a portfolio that’s quite focused on those large caps.”
The AB Managed Volatility Equities Fund was launched on 31 March 2014 and delivered a 13.03 per cent annualised return over two years, outperforming the market by an annualised 10.08 per cent.
Maslen said the fund was well suited to the specific needs of SMSF investors.
“Typically, people are more likely to be [establishing an SMSF] when they’ve got higher balances, so they’re older and getting closer to retirement or in retirement, so this fund is naturally suited to them – the needs of SMSFs are important in thinking about the design of this,” he said.
“The 30 per cent to 40 per cent [in SMSF flows] demonstrates that they are more fragmented and it takes a bit more time to reach out to them, but we’re certainly getting positive feedback.
“I think that 30 per cent to 40 per cent will be maintained, if not increase, over time and the suite could be expanded over time.”
When identifying low-volatility stocks, AB looked for stocks with stable share prices, quality characteristics, particularly strong cash flows, and good valuations.
“One of the things quite different about the fund is because Australia’s so concentrated in a few sectors, there are some gaps,” Maslen said.
“The fund invests in global stocks and we typically use that to fill the gaps with things that we don’t do a lot of in Australia. Two areas to illustrate that are technology and pharmaceuticals.
“We find that we can significantly improve the quality and stability of the portfolio by having 20 per cent invested in global, which we keep consistent the whole time – we don’t have 30 per cent some months and 10 per cent during other months.”
Commenting on adviser feedback when it came to themes involving their SMSF clients, he said in volatile markets there was a strong desire to significantly reduce drawdowns.
“It’s definitely been amplified because if you look at the volatility as measured by the VIX (CBOE Volatility Index), volatility since August has been much higher,” he said.
“We have a belief that volatility typically, when it steps up, persists for some time, so there’s a pretty good chance that we’ll see volatile markets for the next year or two.”
