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Volatility Equities White Paper

Remastering Volatility

Reducing Noise in Equity Allocations

28 October 2019
3 min read

What You Need to Know

Volatility is a challenge that has vexed equity investors for decades and has been amplified in today’s low interest-rate environment. As many investors reach for higher-return assets to help meet future obligations, they are likely to be more exposed to the higher inherent volatility that stocks add to an allocation. In this paper, we examine the root causes of volatility to provide a holistic perspective on risk-management solutions for the current complex environment. Distinguishing between market risk, factor risk and stock-specific risk can help investors identify the most appropriate strategic solutions to combat volatility and ensure that they are compensated for the risk in their equity portfolios.

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9%
MSCI ACWI volatility, 1H 2019
nearly double 2017 level
44%
Stock volatility of companies
with the most unstable cash flows
20%
Increase in volatility
high-leverage companies vs. low-leverage companies
Authors
Chris Hogbin| Global Head—Investments
Christopher W. Marx| Global Head—Equity Business Development
Nelson Yu| Head—Equities

In the fourth quarter of 2018, many equity investors had good reason to feel anxious. Stocks were falling sharply, and by late December, US and global equities had tumbled by 20% and 17% from their respective September peaks. News headlines warned of recession and an imminent bear market. Amid the noise, it may even have seemed sensible to reduce or exit an allocation to stocks.

Those who did would regret the decision just a few months later. By the beginning of the second quarter in 2019, stock markets had recovered their losses from the fourth quarter of 2018. Despite the renewed confidence, many investors still feared the potential for further uncertainty to derail future returns. Even in a rising market, the anxiety caused by large market swings is very unsettling and may even cost investors money if they feel compelled to act in the midst of short-term events.

In this paper, we aim to provide a holistic perspective on a challenge that has vexed investors for decades: managing volatility in equity portfolios. By examining the root causes of volatility, we aim to provide a broader perspective on risk-management solutions for today’s complex environment. Distinguishing between market risk, factor risk and stock-specific risk can help investors identify the most appropriate strategic solutions to combat volatility and ensure that they are compensated for the risk in their equity portfolios.

Staying Invested Through Bouts of Turbulence

Equity market turbulence is nothing new. During the 10-year bull run since the end of the global financial crisis in early 2009, markets have been especially calm for prolonged periods because of the easy-money policies of central banks. The MSCI ACWI posted volatility of 5% in 2017, capping a six-year period of below-average volatility. The following year, volatility jumped to 11% (Display). Persistent volatility is widely expected in the years ahead because of the potential slowing of the economy, uncertainty over interest rates and monetary policy, and heightened political risks.

By identifying the sources of volatility, active managers can improve an investing experience and help investors stay in the market through bouts of turbulence. Reducing the noise that interferes with an investing plan is the key to remastering portfolios and realizing the benefits of long-term equity returns.

Volatility Is Back and - Likely to Persist

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

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About the Authors

Chris Hogbin is the Global Head of Investments for AB. In this broad leadership role, he oversees all the firm’s investment activities. Hogbin is responsible for driving investment success across asset classes, fostering collaboration and sharing best practices across investment teams, as well as leveraging a common infrastructure and evaluating opportunities to invest in capabilities that deliver better outcomes for clients. He is also a member of the firm’s Leadership team and Operating Committee. Hogbin joined AB’s institutional research business in 2005 as a senior analyst covering the European food retail sector. In 2010, he was named to Institutional Investor’s All-Europe Research Team and was ranked as the #1 analyst in his sector in both 2011 and 2012. Hogbin became European director of research for the Sell Side in 2012 and was given additional responsibility for Asian research in 2016. In 2018, he was appointed COO of Equities for AB. In 2019 Hogbin was promoted to co-head of Equities, becoming head of Equities in 2020. Prior to joining the firm, he worked as a strategy consultant for the Boston Consulting Group in London, San Francisco and Shanghai, where he was responsible for the execution of critical business-improvement initiatives for clients in the financial-services and consumer sectors. He holds an MA in economics from the University of Cambridge and an MBA with distinction from Harvard Business School. He is a trustee of the Public Theater in New York.

Christopher W. Marx is Senior Vice President and Global Head of Equity Business Development. He is responsible for overseeing the firm's team of equity investment strategists and product managers, setting strategic priorities and goals for the global Equities business, developing new products, and engaging with clients to represent market views and investment strategies of the firm. Previously, Marx was a senior investment strategist and a portfolio manager of Equities, and in 2011 he cofounded the Global, International and US Strategic Core Equity portfolios with Kent Hargis. He joined the firm in 1997 as a research analyst covering a variety of industries both domestically and internationally, including chemicals, metals, retail and consumer staples. Marx became part of the portfolio-management team in 2004. Prior to joining the firm, he spent six years as a consultant for Deloitte & Touche and Boston Consulting Group. Marx holds a BA in economics from Harvard University and an MBA from the Stanford Graduate School of Business. Location: New York

Nelson Yu is a Senior Vice President, Head of Equities and a member of the firm’s Operating Committee. As Head of Equities, he is responsible for the management and strategic growth of AB’s equities business and investment decisions across the department. Since 1993, Yu has experience generating investment success in global equity markets by joining fundamental research with rigorous quantitative methods. He joined AB in 1997 as a programmer and analyst, and served as head of Quantitative Equity Research from 2014–2021. Since 2017, Yu also served as head of Multi-Style Core Equity strategies, with over $10 billion in assets. Most recently, he was CIO of Equities Investment Sciences and Insights, which brings together resources across Data Science, Quantitative Research, Advisory Services, Risk and Global Execution to deliver differentiated capabilities and insights to AB’s equities investment platform. Prior to joining AB, Yu was a supervising consultant at Grant Thornton. He holds a BSE in systems engineering from the University of Pennsylvania and a BS in Economics from the Wharton School at the University of Pennsylvania. Yu is a CFA charterholder. Location: New York

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