RT Journal Article
SR Electronic
T1 How a New Benchmark Adds to the Evaluation of a Defensive Equity Strategy
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 6
OP 17
DO 10.3905/jii.2021.1.103
VO 11-12
IS 4-1
A1 John A. Cardinali
A1 Richard Yasenchak
YR 2021
UL https://pm-research.com/content/11-12/4-1/6.abstract
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: Fundamental equity analysis, portfolio construction, volatility measures, 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.