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Presenting our active management insights with the discipline of a rules-based investment approach This case study explains how strategic beta can give institutional investors the returns they seek with lower volatility, rather than staying with the traditional active and passive strategies. Discover how the benefits of strategic beta can deliver conve

The Challenge

Many institutions are de-risking portfolios to reduce the likelihood of funding shortfalls from adverse market moves. Additionally, some institutional investors seek higher returns from higher risk asset classes in the hope of improving their funded status.
In these cases, equity markets are the key - reduce equities to lower risk or seek higher returns through high alpha (and usually higher risk) strategies.
Market cap-weighted indexes have become the de facto gauge of equity market risk and return, yet they are not perfect. Though they are typically a good proxy of the opportunity set they are meant to represent, they have two inherent flaws-they:
  • Are prone to concentrations of risk and
  • Have an inherent preference for over-valuation
The Financial sector is currently 21% of the global stock market but represents 40% of the risk.
Source: FTSE, JPMAM.  FTSE Developed Index sector weights and risk as of 7/23/2014. Risk proportion equals the product of the squared sector weight and the squared 3 year trailing volatility as a percentage of the total.
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Our Approach

We begin with the objective of constructing a better index with risk and return in mind (where the goal is a better Sharpe ratio than cap-weighted index):
  • Risk - In the absence of any high probability knowledge of future region or sector returns, but having a reasonable predictor of future risk (using historical), it seems logical to equally distribute risk across regions and sectors.

  • Return - Stocks with certain common factors have long been identified by academics as producing above market returns, yet these anomalies have persisted nonetheless. Why not select a subset of stocks within each regional sector based on exposure to a combination of positive return factors?


The Solution

Strategic beta offers the benefits of active management with the discipline of a rules-based investment strategy.
Strategic beta strategies generally aim to improve investor returns or reduce risks relative to cap-weighted benchmarks. The latest generation of strategic beta strategies combines multiple factor exposures to deliver convenient institutional investment solutions.
By diversifying away from traditional active and traditional passive strategies, strategic beta can potentially provide institutional investors with the returns they seek with lower volatility.

years with
J.P. Morgan