PT  - JOURNAL ARTICLE
AU  - John A. Cardinali
AU  - Richard Yasenchak
TI  - How a New Benchmark Adds to the Evaluation of a Defensive Equity Strategy
AID  - 10.3905/jii.2021.1.103
DP  - 2021 Apr 16
TA  - The Journal of Index Investing
PG  - jii.2021.1.103
4099  - https://pm-research.com/content/early/2021/04/16/jii.2021.1.103.short
4100  - https://pm-research.com/content/early/2021/04/16/jii.2021.1.103.full
AB  - Defensive equity strategies represent a useful addition to an equity allocation, but evaluating them in a typical relative risk–return framework can be awkward. In some cases, changing from a cap-weighted benchmark or supplementing it with a defensive equity index can simplify and enhance the evaluation of managers and their performance. MSCI’s Minimum Volatility Indexes are one such option, but design constraints need to be understood before incorporation. An active strategy using a Minimum Volatility Index as a benchmark can help by keeping the benefits of defensive equity—downside protection and lower overall volatility—while adding an alpha component you can more easily measure and explain.TOPICS: Security analysis and valuation, portfolio construction, performance measurement, risk managementKey Findings▪ Defensive equity strategies represent a useful addition to an equity allocation, but evaluating them in a typical relative risk–return framework can be awkward. ▪ In some cases, changing from a cap-weighted benchmark or supplementing it with a defensive equity index can simplify and enhance evaluation of managers and their performance. MSCI’s Minimum Volatility Indexes are one such option, but design constraints need to be understood before incorporation. ▪ An active strategy using a Minimum Volatility Index as a benchmark can help by keeping the benefits of defensive equity—downside protection and lower overall volatility—while adding an alpha component you can more easily measure and explain.