By: Noah Monsen, CFA, Senior Portfolio Manager, Thrivent Asset Management March 30, 2020
As volatility ramps up in the markets, many investors are searching for a way to participate in the market without experiencing the extreme swings that have become common during the COVID-19 crisis.
The Thrivent Low Volatility Equity Fund was conceived in 2017 with that purpose in mind. While the fund cannot eliminate losses in a down market, the portfolio is designed with the goal of lower volatility.
During the recent downturn, the Fund’s portfolio has experienced less volatility than the overall market. The severity of the recent downturn made negative returns inevitable for most equity funds and presented unique challenges to our low volatility strategy. At the onset of the downturn, many investors rushed to raise cash as quickly as possible, leading many assets traditionally thought to be safe havens, such as gold and U.S. Treasuries, to perform negatively along with riskier assets. This dynamic also affected the Fund, which tends to hold larger, more stable and liquid stocks.
Many of these more stable and liquid stocks were sold aggressively in the most severe down days, as more volatile, less liquid stocks became difficult to sell at all, and investors were forced to sell whatever they could. This meant that nearly all stocks were moving together, and the low correlation among the stocks we own temporarily increased dramatically. Despite this challenging environment, the Fund has fared well relative to its peers in its Morningstar World Large Stock category.i
Although the Fund’s performance has followed the downward trend of the overall market, the volatility has been less extreme, and the losses have been less pronounced.
For example, in 2020, through March 20, the median fund in the Morningstar World Large Stock category was down 29.07%, while the Thrivent Low Volatility Fund was down 25.16%. It has been performing in the top 18% of its Morningstar category through the first two and a half months of 2020. The contributors to the Fund’s outperformance in this time period, relative to the MSCI World Low Volatility Index,ii have been security selection in the consumer discretionary sector, and overweight to the health care sector with a focus on particular pharmaceutical companies, as well as an underweight to the financial sector.
For the month of March (through March 20), the most volatile period of the year, the fund was in the top 17% in its Morningstar peer group. The Morningstar peer group contains both low-volatility-focused funds similar to Thrivent Low Volatility Equity Fund and other funds without a low-volatility mandate. The fact that the Thrivent Low Volatility Equity Fund has delivered relative outperformance of its peer group during this period of heightened volatility demonstrates that it has been performing as designed.
Specifically, the Fund seeks to provide risk-adjusted returnsiii with long-run performance similar to the MSCI World Indexiv but with less volatility. What this means is that over a complete market cycle, we seek to match the performance of the global market but without hitting the highest highs and the lowest lows.
While performance may vary widely from the index over a three- to five-year period, the Fund is designed to perform fairly closely to the market average over a longer period of 10 years or more.
We expect the portfolio to outperform the market index in a down market and underperform the index in an up market. While this is the expectation, like all equity investing, the results may vary depending on market circumstances.
When working towards a less volatile experience, returns for this fund are likely to lag the global market over shorter bull market time periods. In a full market cycle, which includes both the bull and bear markets, the fund seeks comparable returns to the global market with substantially less volatility, which may produce better risk-adjusted returns.
The path to lower volatility
The Fund seeks to reduce portfolio volatility in two ways: stock selection and portfolio construction. The Fund invests in a diverse portfolio of large- and mid-capitalization stocks from the U.S. and developed markets around the world with an emphasis on low volatility stocks.
The Fund’s portfolio is typically constructed with about 60% U.S. stocks and 40% stocks from international markets, including Europe, Japan, Hong Kong, Singapore, Australia, and New Zealand.
Although the Fund has investments in all 11 primary industrial sectors,v the emphasis on lower volatility stocks leads us to overweight lower volatility sectors, such as utilities and consumer staples, and underweight sectors that tend to have higher volatility, such as information technology and real estate.
We expect the Fund to typically provide a dividend yield above its peer group median because of the tendency for dividend-paying companies to have lower volatility than their non-dividend-paying peers.
In addition to emphasizing low volatility stocks, we use a quantitative alpha model to select individual stocks that we believe have the potential to outperform other similar stocks. The model scores stocks based on characteristics that our research has shown to predict outperformance historically, including valuation, momentum, growth, and quality.
Finally, besides selecting low volatility stocks, we seek to reduce the portfolio’s volatility by selecting stocks with low correlation to each other. In other words, selecting stocks that don’t all move up or down in the market at the same time.
We utilize a portfolio optimizer tool that balances the potential return from our quantitative model with the stocks’ risks and the correlations among the stocks. The optimized portfolio maximizes the diversification among the holdings, with the goal of a lower rate of volatility than we could achieve through stock selection alone. While this process will not prevent losses in the event of a market downturn, it can help to reduce the downside risk.
Like all equity investments, the Fund does face a variety of risks, including market and individual security risk. The value of the Fund is influenced by factors impacting the overall market, certain asset classes, certain investment styles, and specific issuers, and may also incur losses due to incorrect assessments of investments.
While the Fund’s portfolio has always remained fully invested, under certain circumstances we may change its construction, or allocation, from that described above. For instance, in a market trough, we might use equity index futures to try to increase the Fund’s rate of recovery relative to the market. In other words, if the market rebounds off a trough, historically the most volatile stocks have moved back up more quickly than the market, and this strategy is designed to take advantage of that trend.
For long-term focused equity investors looking for a less volatile ride through a market cycle without sacrificing the opportunity for stock market growth, the Thrivent Low Volatility Equity Fund may be an appropriate addition to a diversified portfolio.
Noah Monsen, CFA, serves as portfolio manager of the Thrivent Low Volatility Equity Fund (since 2017), the Thrivent Balanced Income Plus Fund (since 2015), Thrivent Diversified Income Plus Fund (since 2015), Thrivent Global Stock Fund (Since 2018), and the international large-cap value assets of the Thrivent International Allocation Fund (since 2016).
The Fund seeks lower volatility than the global equity markets, however it will experience some volatility. The Fund’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. The use of quantitative investing techniques and derivatives such as futures also involve risks. Foreign investments involve additional risks, such as currency fluctuations and political, economic and market instability, which may be magnified for investments in emerging markets. These and other risks are described in the prospectus.
All information and representations herein are as of 03/30/2020, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
All data represents past performance. Past performance does not guarantee future results. The investment return and principal value of the investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. See performance results current to the most recent month-end.
An index is unmanaged, and an investment cannot be made directly in an index.
i Morningstar World Large Stock Category. World large stock portfolios invest in a variety of international stocks that are larger. World-stock portfolios have few geographical limitations. It is common for these portfolios to invest the majority of their assets in developed markets, with the remainder divided among the globe’s smaller markets. These portfolios typically have 20%-60% of assets in U.S. stocks.
ii The MSCI Low Volatility Index aims to reflect the performance characteristics of a minimum variance strategy focused on absolute returns as well as volatility with the lowest absolute risk.
iii Risk-adjusted return refers to the amount of risk an investment takes on relative to the performance of the investment. For instance, if two investments have identical performance over a given time period, the one with the lower risk level would be considered to have a better risk-adjusted return.
iv The MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets countries.
v The 11 S&P 500 sectors include Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, Telecom Services, and Utilities. The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
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