Investing in stocks has historically provided the potential growth investors need when accumulating assets as they prepare for retirement. In times of market volatility, however, an account’s drop in value can result in investors selling stocks at near-low levels and then buying them back at higher ones when markets recover.
Low-volatility equity strategies can provide risk-adjusted returns with better downside protection versus traditional cap-weighted benchmarks, said Ian Baker, senior vice-president and head of fundamental and quantitative research with Pyramis Global Advisors.
It’s valuable to have this type of product available on a DC platform, said Baker, because its risk characteristics allow plan members to maintain equity exposure as they approach retirement age without worrying as much about the risk of loss. In other words, a low-volatility equity portfolio can keep investors from getting hurt while growing over time.
This is especially important to combat longevity risk, since members need to maintain allocations to high-return assets while at the same time being conscious of the risk of potential drawdowns if equity markets move lower, he added.
“We think there is a place for [low-volatility equity] in a DC plan,” Baker said. “It allows the participant to hold potentially higher equity allocations for longer periods of time. Products like this can achieve your objectives in ways that traditional equity and fixed income allocations can’t easily do.”