Unlocking low volatility strategies

Volatility has become a persistent trend in equity markets, as information flows ever more rapidly from one market to another. A strategy that harnesses the power of this data flow may provide a solution to the uncertainty that investors face.

With $4 billion of assets under management in low-volatility strategies, the Mackenzie Global Quantitative Equity Team is one of the largest players in the space. Our recently launched low-volatility strategies help investors stay in the market by aiming to reduce the impact of volatility on investor portfolios.

The team is focused on delivering alpha with a core, bottom-up approach to help navigate various market environments with resilience and adaptability.

The Mackenzie World Low Volatility Fund, a strategic extension of our existing Mackenzie Global Equity Fund, invests in less-volatile stocks from around the world. Many are household names found in relatively stable sectors, such as consumer staples, health care and financials.

Global and regional perspectives

When it comes to developing our models and insights, we start by ranking stocks on a global and regional level, comparing them against their sector peers for a comprehensive perspective on their performance and potential.

We divide the developed world into four regions: the US, Europe, Japan and the rest of the world (Australia, Canada and Asia ex-Japan). We then apply a blend of global and regional views to assess individual stocks.

With NVIDIA, for example, we assess its ranking against IT and Semiconductors peers in the region (US) and at a global level. We consider metrics like size, proportion of revenue outside the region, and competitors in determining its weight within a global ranking. On the other hand, for a smaller cap US or Canadian name, its regional ranking will likely take precedence.

In the realm of emerging markets, our focus shifts to a purely regional ranking. We have found that this is comprehensive for our current stock selection process. In analyzing stocks from a regional standpoint, we can better understand the dynamics and opportunities unique to these markets. Samsung, for example, is ranked in the context of our defined “Asia ex-China” region.

Contrasting low volatility

As we dig deeper into the nuances of low volatility investing, we can expect significant differences in sector and country weightings between the Mackenzie World Low Volatility Fund and the Mackenzie Global Equity Fund. Sectors like consumer staples and health care tend to receive higher weightings in low volatility strategies due to their stability, while more volatile sectors like technology and consumer discretionary tend to see reduced weightings.

Weighting differences at the country level are not as significant, but noteworthy. Countries with a strong presence of stable industries, such as Japan and Switzerland, tend to have higher weightings in low volatility indices. Conversely, countries with a higher concentration of volatile sectors may see reduced weightings in the low volatility index. For example, while the US accounts for a significant proportion of the Mackenzie World Low Volatility Fund portfolio, its weighting is even higher in the Mackenzie Global Equity Fund, due to the country’s abundance of technology players.

The Mackenzie World Low Volatility Fund is based on the team’s solid established discipline. Our view on — and ranking of — a stock remains the same across all our strategies, but the number of names from a particular sector or country featured in a particular strategy will vary. The additional constraint of a portfolio volatility less than or equal to that of the benchmark further defines the playing field of this strategy.

Process innovation

We continue to evolve and refine our approach to selecting stocks based on our suite of metrics. Incorporating machine learning and other advanced techniques into our investment process has enhanced our capabilities over the past five years. One notable addition across our strategies is a non-linear machine learning technique that we believe predicts company fundamentals more accurately than traditional sell-side analysts. This technique has been back-tested on more than 25 years of data and allows us to identify potential opportunities and risks with greater precision.

When it comes to trading within our portfolios, we continue to prioritize efficiency and first-class execution. We ensure timely and informed decision-making by ranking stocks daily and executing trades based on those rankings. Our team’s in-house trader closely monitors round-trip transaction costs and market impact during portfolio construction prior to each trade decision to optimize our execution and performance.

Conclusion

By prudently applying innovative technologies to our stock selection process, we believe the Mackenzie Global Quantitative Equity Team is well-positioned to navigate low-volatility investing in today’s market landscape. We continue to pursue alpha opportunities while constructing portfolios to weather and respond to any market cycle.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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