Natixis’ Alex Piré shared thoughts concerning how actively managed products such as its International Minimum Volatility ETF (MVIN) can handle volatility, during a recent call to ETF Trends.
Piré, who is Head of Client Portfolio Management for Seeyond at Natixis Investment Managers, notes how complacency in the market for the past few years has allowed passive investments to take hold. With an actively managed product, thanks to recent volatility for the first time in a few years, the market is sending different signals.
A lot more talk about a recession and focus on trade wars have provided a wake-up call to investors who are being told to make sure and look to diversify their portfolio internationally. The past few months provided a good reason for not just simply putting a lot of money into the S&P index, expecting it to go up.
As Piré explained, investors need to realize they shouldn’t just have a full US-based portfolio. There is importance in going international and taking advantage of global markets.
Hanging Onto Home Country Bias
Natixis Senior Trader and Portfolio Manager Alexander Nary added they have a benefit of looking at the market as also being a European manager. He highlighted its Natixis Seeyond International Minimum Volatility ETF (MVIN) that has a broader view of the world, with a home country bias made up of all of Europe. Because of that, the view is globalized.
Additionally, they are risk managers. So, the idea is to find individual securities risk, pocket areas of risks, and deliver correlations in how these volatilities might interact across different markets.
Nary noted how taking these components and looking at it more broadly allows one to see how types of risk are likely to occur in a US-based portfolio. Historically, it’s been observed that securities tend to be highly correlated to each other.
Overall, particularly in the past ten years, most securities have moved in tandem. The majority of the return of the S&P has been tied to the top 2% of stocks. That creates a relatively significant portion of portfolios in the US with a home country bias linked to the S&P or the US equities market, which tends to move very sharply one way or the other.
“What you end up finding is that you’re actually gaining a significant amount of diversification by investing in regions and countries that tend to not always move together,” Says Nary. When thinking about the way MVIN is constructed, about 30% of the portfolio is exposed to Japan. There’s also exposure to European equities, Australia, Canada, and other regions showing actual global exposure.
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As a result, investors get the benefit of this diversification, a lower correlation amongst the stocks that are owned. There’s also the benefit of exposure beyond home country bias.
The additional constraint occurring as an investor with a home country bias in the US revolves around human exposure to US equities, market, economy, etc. When human capital and financial capital are tied heavily to the same region or country, it can present several risks.
Having the diversification benefits outside of the US is vital for all investors, particularly those with a home country bias steered towards the US already. As nary concludes, “It may be even more important to work beyond just US equity markets.”
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