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Minimum risk - a systematic investment concept

Reading time 10 minutes

Who dares nothing, wins nothing - so the saying goes. The same applies to financial investments: the higher the risk (through investments in shares), the better the long-term return. This is a statement that there is actually nothing to counter. But would it perhaps be possible to achieve a slightly higher return with the same risk? Our answer: Yes, absolutely! And in the current low interest rate environment even more important than ever.

OLZ focuses exclusively on risks. What sounds like a boring investment approach is aimed at many more investors than just those who shy away from any kind of risk. The focus on volatility does not stem from our "risk aversion", but from the scientifically proven fact that investment risks can be predicted more reliably than investment returns. Our minimum risk strategy takes into account not only the volatility of individual stocks, but also their behaviour in relation to each other (correlation). If these two factors are combined in an optimization, the result is a portfolio that performs better in the long term than conventional, capital-weighted index solutions. In this context, "performing better" means two things: on the one hand, the portfolio risk is systematically reduced, and on the other hand, shares with low volatility deliver an additional return in the long term. Thanks to the lower portfolio risk, a higher equity allocation can be held for the same level of risk, which leads to a higher equity premium.

Systematic reduction of portfolio risk

The volatility of our OLZ Equity World ex CH Optimized ESG strategy is on average almost 30% lower than the volatility of the index (see Figure 1). The reduction in risk can be observed over time, independent of the market environment. Moreover, partial hedging of foreign currency risks further increases the extent of risk reduction.

Figure 1 - Systematically lower portfolio volatility

The lower volatility compared to the capital-weighted index is not only observed over a long time horizon, but also when it really matters - in times of crisis. Figure 2 shows, using some examples from recent years, that when market volatility rises sharply (an indication of increased nervousness) our risk-optimized equity portfolios outperform the benchmark.

Figure 2 - Successful stress tests 2018-2020 (volatility measured by VIX index / Fund: OLZ Equity World ex CH Optimized ESG 2 / Benchmark: MSCI World ex CH Index)

Higher equity exposure at equal risk level

With the OLZ Minimum Risk approach you can sleep peacefully - or, depending on your individual risk budget, you can generate more return in the long term. The risk budget describes the risk that an investor is able and willing to bear. When designing the investment strategy, the efficient allocation of the risk budget should be at the centre of attention. In this context, efficiency means that the more attractive the risk-return profile of an asset class, the more can be allocated to it from the risk budget. In the long term, equities offer a scientifically proven excess return over bonds. In a traditional portfolio - consisting of equities, bonds and liquidity - equities therefore account for the bulk of the risk budget. If the equity component is implemented in a risk-optimized manner, a correspondingly larger equity quota can be used with the same risk budget. In the long term, a higher equity allocation means a higher expected portfolio return and thus a more efficient use of the risk budget. Figure 3 shows that a pension fund with 30%-35% shares, for example, could increase the equity allocation to around 40% without taking on more risk.

Figure 3 - Higher equity exposure for the same risk

Those who strive for higher returns do not necessarily have to take greater risks. A risk-optimized equity strategy not only allows for an expansion of the equity component, but also offers more freedom in the asset allocation in general. This offers the the opportunity to use the risk budget efficiently. Either way, you are in better hands as an investor if you do not only have the return in mind. In the long run, this comes naturally with a disciplined, scientifically sound and risk-based investment approach.


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