Equities White Paper

The Upside of Less Downside

How Defense Wins in Equities

04 October 2016
2 min read
How Defense Wins in Equities

What You Need to Know

Soaring stock prices thrill investors, but it's the disciplined, less glamorous efforts to not lose money that build lasting wealth. It's possible to get downside protection and still beat the market over time. Here's how.

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90%/70%
upside/downside capture provides downside protection
and still beats the market over the long term
12.5%
annualized return of 90%/70% upside downside portfolio
(1974-2016)
9.9%
annualized return MSCI World
(1974-2016)
Authors
Kent Hargis, PhD| Co-Chief Investment Officer—Strategic Core Equities
Sammy Suzuki, CFA| Head—Emerging Markets Equities
Christopher W. Marx| Global Head—Equity Business Development

Turning Less Into More

It’s a deeply ingrained investing maxim that risk and return go hand in hand: to get more return, you must accept more risk. So, for some investors, it may seem counterintuitive that the opposite is also true: you can take less risk and still beat the market over time. It’s a different way of defining investment success that leans on downside defenses in the pursuit of long-term goals.

Following the extended postcrisis bull runs in bonds and equities, the future returns of many traditional investing strategies are unlikely to pack the same punch. Investors are realizing that they’ll need to take more risk to meet their long-term goals, including adding equity exposure.

That’s a troubling proposition for a large and growing group of investors. Whether an individual saving for retirement, a pension plan facing funding gaps, or an insurance company dealing with stiffer capital requirements and asset/liability-matching challenges, investors are much more risk-sensitive today. They can’t tolerate wild market swings, let alone the prospect of losing money. They need their investments to go the distance.

That’s where strategies that expressly target downside-risk protection come in. These solutions get their performance power from the simple mathematics of lower risk drag and compounding. Stocks that lose less in market downturns have less ground to regain when the market recovers, so they’re better positioned to compound off those higher returns in subsequent rallies (Display).

Get Downside Protection and Still Beat the Market
Growth of US$100
Get Downside Protection and Still Beat the Market

Through June 30, 2016
Past performance does not guarantee future results. Returns shown are for illustrative purposes and not representative of any AB fund. It is not possible to invest in an index.
*Performance calculated by multiplying all positive monthly returns (0% or greater) of the MSCI World Index by 90% and all negative returns (less than 0%) by 70%; shown in logarithmic scale
†Annualized standard deviation
Source: MSCI and AB

Over time, this gentler return pattern can end up ahead of the market.

The Advantages

Because these smoother-ride equity strategies focus on buffering market shocks, they offer several advantages:

  • They help investors to stay the course in equities, preventing the tendency to buy high when markets boom and sell too quickly when they slump—and miss out on future recoveries.
  • They help shield against the corrosive effects of risk drag, which is particularly important for investors who need to start spending their money.
  • They provide flexibility in budgeting portfolio risk and allowing for increased allocations to return-seeking strategies.

Given these characteristics, we view smoother-ride strategies as attractive choices for a core equity allocation. An active, multifaceted approach that combines built-in downside defenses with the traits of high fundamental quality and attractive valuation is an effective way to tap this potential. And investors can use these strategies in various ways to drive better long-term outcomes.

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. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

About the Authors

Kent Hargis is Co-Chief Investment Officer of Strategic Core Equities. He has been managing the Global, International and US portfolios since their inception in 2011, and the Emerging Markets Strategic Core Portfolio since January 2015. Hargis was named head of Quantitative Research for Equities in 2009, with responsibility for overseeing the research and application of risk and return models across the firm's equity portfolios.

Hargis joined the firm in 2003 as a senior quantitative strategist. Prior to that, he was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. He holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets.

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business and instrumental in the formation and shaping of AB’s Emerging Markets Equity platform. He was also a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE (magna cum laude)  in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: 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