Minimum risk in 2022 – a textbook example in the first quarter

Towards the end of the 1st quarter, a strong countermovement set in which brightened the overall picture somewhat. We are taking these first three months of the year as an opportunity to outline how the OLZ Minimum Risk Strategy works, using current events as an example.

Market performance and market risk change as performance drivers

In our blog post  «Performance depends on the market regime», we shed light on how market performance and market risk change affect the relative performance of our risk-based equity funds. To briefly recap, while falling prices and rising volatility are beneficial to our approach, strongly positive markets and falling volatility tend to bring a lag to the cap-weighted benchmark.

A quarter of extremes

In Q1 2022, as already mentioned in the introduction, we were able to observe both extremes in close succession. Let us look at the MSCI World ex CH Index and, as a proxy for market risk, the VIX Index (which tracks the expected volatility of the S&P 500 Index). The market index lost around 11.5% by March 8. At the same time, the VIX Index increased significantly. Market risk has practically doubled since the beginning of the year. During this phase, our OLZ Equity World ex CH Optimized ESG fund benefited from its more defensive orientation and risk-optimized stock selection. As a result, it was able to reduce its loss and outperformed the benchmark index by more than 7%.

In the second half of March, things went in the other direction. The index gained 8% by the end of the month, while volatility eased significantly. In a phase where riskier stocks are more sought after again, our strategy could not keep up with the cap-weighted benchmark and gave up part of the previously built up outperformance. In contrast to the index, our fund was virtually unscathed in the turbulent Q1 and fulfilled the demands placed on it: Reduce drawdowns and volatility.

Wide range of applications

In phases of heightened uncertainty, a strategy with deliberate risk management naturally makes sense. In this way, without lowering the equity quota and seeking alternative asset classes, the portfolio risk can be significantly reduced. So do OLZ funds make sense only in turbulent times? Not at all! Instead of reducing the portfolio risk compared to a passive implementation, the equity quota can be increased for the same risk. A larger equity quota promises a higher return in the long term and thus ensures a more optimal utilization of the individual risk budget.

The key is not the absolute return, but the risk-adjusted return. In other words, how much return do I get for the risk I take? This ratio is often neglected in the unconditional pursuit of performance, but it is absolutely central to long-term investment success and should be taken into account accordingly in portfolio construction.