OLZ Minimum Risk Investment Concept - A Situation Update

Minimum risk strategy: Benefits for investors

No risk, no return. This is the conventional wisdom of the financial markets. In principle, there is nothing to contradict this statement. If you want to earn more, you will inevitably choose a higher equity allocation in a standard mixed portfolio and expose your assets to correspondingly greater fluctuations in value. But the question is whether these investment risks can't be reduced somewhat without diminishing the prospect of long-term returns.

This is precisely where the OLZ minimum risk investment concept comes into play. It takes into account not only the fluctuation of individual stock prices (volatility), but also their behavior in relation to one another (correlations). Combining these two factors in an optimization results in a much better diversified portfolio than conventional, capital-weighted index solutions. Better diversification means lower fluctuations in value and lower drawdowns in negative market phases. The lower investment risk comes with no reduction in long-term return prospects, which in turn leads to better risk-adjusted performance over time.

The more stable portfolio performance not only lets investors sleep more soundly, but also provides greater security when it comes to achieving individual investment goals. For private investors, for example, when it comes to planning savings targets and payouts, or for pension funds, when the funding ratio needs to be stabilized.

The approach also offers significant added value in the context of a mixed mandate. For example, thanks to the lower risk, a higher equity quota can be selected compared to index-tracking solutions, thus making more efficient use of the individual risk budget. The higher equity quota at the same level of risk thus increases the expected long-term return.

Good times - bad times

In the financial markets, not only the level of prices changes, but also that of market risks. Phases of low and high volatility alternate at irregular intervals. Depending on the orientation of the investment style, one performs differently in the various market phases. The OLZ minimum risk approach delivers the greatest added value in periods of increased price fluctuations. In phases of low market volatility, when investment risks receive little attention, it tends to lag behind the capital-weighted market index. This behavior has been very observable in recent years.

The low interest rate environment and the liquidity glut from central banks were the main drivers of many investment decisions before 2022 and led to a high demand for equity investments ("there is no alternative"). Risk considerations were increasingly relegated to the background and price setbacks were seen more as a buying opportunity than a threat. In this strongly positive market environment, our risk-optimized strategy lagged behind the capital-weighted benchmark. In Corona Year 2020, fear of the pandemic and its unclear impact dragged down all stocks in a relatively undifferentiated manner. For once, positioning in more defensive stocks and sectors barely helped in this crash. In the subsequent strong recovery, risky, growth-oriented technology stocks, which are generally underrepresented in our portfolios, were the main beneficiaries. Accordingly, risk-based defensive strategies also underperformed in the strong rebound.

The picture was very different in turbulent 2022. With the end of ultra-loose monetary policy, virtually all asset classes began to move. The stock markets reacted to rising interest rates in a huffy and volatile manner. Interest rate-sensitive growth stocks lost the most value - in other words, precisely those stocks that had been among the biggest winners in previous years. As far as the "physical laws" of the financial markets are concerned, a normalization took place last year. In particular, the central banks' lack of a safety net ensured that market participants became aware of investment risks again. Accordingly, the OLZ Minimum Risk approach again delivered added value, and was able to cushion the losses in value significantly.

Patience pays off!

Admittedly, anyone who has been invested in risk-optimized strategies in recent years has needed patience and perseverance. Especially in a seemingly risk-free environment, it is particularly difficult to stick to a disciplined long-term investment approach with systematic risk management while the broad market is looking at you in the rear-view mirror. But it wasn't just 2022 that showed how quickly the world can change. Nervousness flared up again and again this year - whether due to the US regional banking crisis or a gloomy economic outlook. All the better advised are those who consistently diversify and deal with risks before they materialize.

In the short to medium term, there may always be phases of underperformance in benchmark comparisons. However, long-term analyses show that the minimum risk strategy still delivers the desired added value. In order to achieve an excess return, a long-term investment horizon, discipline and, above all, patience are required - depending on the time of investment - in order to survive even exceptional market phases with a shortfall.