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For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
Practical Volatility Management through an Array of Indices
Priscilla Luk
Director, Index Research & Design
S&P Dow Jones Indices
8th May, 2014 / Hong Kong
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 2
REDUCING VOLATILITY EXPOSURE
CONTROLLING VOLATILITY EXPOSURE
HEDGING VOLATILITY EXPOSURE
01
02
03 SUMMARY 04
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
3
Capital preservation is difficult in a volatile market. After a large loss, gains needed to break even may take years to achieve.
Year 1
$10
Year 3
$5
Year X
$10
Year 2
$20
return = 100%
return = -75%
need to gain 100% to break
even
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
4
Managing Volatility Exposure Through
S&P Dow Jones Indices
S&P Low Volatility Indices
Reducing risk exposure through stock selection and
alternative weighting
Underlying assets:
100% in equities
S&P Risk Control Indices
Controlling risk exposure at target levels through varying
exposures to equities and cash
Underlying assets:
Equities & Cash
S&P 500 Dynamic VEQTOR Index
Hedging potential downside risk by dynamic allocation
among equities, volatility and cash
Underlying assets:
Equities, VIX futures & Cash
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 5
REDUCING VOLATILITY EXPOSURE
CONTROLLING VOLATILITY EXPOSURE
HEDGING VOLATILITY EXPOSURE
01
02
03 SUMMARY 04
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
REDUCING VOLATILITY EXPOSURE THROUGH S&P LOW VOLATILITY INDICES
6
• S&P Low Volatility Indices provide exposure to equity markets with reduced volatility exposures.
• It adopts the simple and transparent rankings-based approach in portfolio construction, seeking to reduce risk exposure through stock selection and alternative weighting:
1. Stocks are ranked by their historical volatilities.
2. A selected number of stocks with least volatilities form the low volatility portfolio
3. Constituents are then weighted by inverse of the volatility figure (i.e. the least volatile stocks receives the highest weightings)
Region S&P Low Volatility Index Constituents
Developed Market
(ex US)
S&P BMI International Developed Low
Volatility Index
200 least volatile stocks in the S&P Developed Ex. US &
South Korea LargeMidCap Index
Emerging MarketS&P BMI Emerging Markets Low
Volatility Index
200 least volatile stocks in the S&P Emerging Plus
LargeMidCap Index
US S&P 500 Low Volatility Index 100 least volatile stocks in the S&P 500
Europe S&P Europe 350 Low Volatility Index 100 least volatile stocks in the S&P Europe 350 Index
Pan Asia S&P Pan Asia Low Volatility Index50 least volatile stocks in the S&P Pan Asia Ex-New
Zealand LargeMidCap Index
Nordic S&P Nordic 350 Low Volatility Index30 least volatile stocks in the S&P Nordic Broad Market
Index (BMI)
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 7
REDUCING VOLATILITY EXPOSURE THROUGH S&P LOW VOLATILITY INDICES
Lowest Volatility
Highest Volatility
Stocks are
ordered by
their 252-
day realized
volatility
(standard
deviation of
price
changes)
Constituents are
weighted by inverse
of volatility figures
Top 100 stocks with lowest
volatility are included to the index
Rest of 400
stocks with
higher
volatility are
excluded
100 least
volatile
stocks
S&P 500
Low
Volatility
Index
S&P 500
Index
Constituent s and weightings are reviewed quarterly
Index Construction: S&P 500 Low Volatility Index
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
REDUCING VOLATILITY EXPOSURE THROUGH S&P LOW VOLATILITY INDICES
8
Source: S&P Dow Jones Indices. Data from March 31, 2004 to March 31, 2014.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13
Utilities
Telecom
Materials
Industrials
I.T.
Health Care
Financials
Energy
Cons Staple
Cons Disc
S&P 500 Low Volatility Index Composition (Mar 2004 – Mar 2014)
Most concentrated in defensive and low volatility sectors: Utilities and Consumer Staples
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
REDUCING VOLATILITY EXPOSURE THROUGH S&P LOW VOLATILITY INDICES
9
• S&P Low Volatility indices were generally 25% to 35% less volatile than the underlying benchmarks
• Their return drawdowns tended to be much reduced historically
Source: S&P Dow Jones Indices. Data from March 31, 2004 to March 31, 2014. The low volatility portfolios are presented by the S&P 500 Low Volatility, S&P Europe 350 Low
Volatility, S&P Pan Asia Low Volatility, S&P BMI International Developed Low Volatility and S&P Emerging Markets Low Volatility Indices. The regional benchmarks are presented by
the S&P 500, S&P Europe BMI, S&P Pan Asia BMI, S&P Developed ex US BMI and S&P Emerging Plus BMI. The S&P Low Volatility index data reflected in this chart may reflect
hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with
back-tested Index data and performance information.
10.4%
13.3%
16.4%
12.8%
15.7%14.7%
18.6%
23.6%
18.1%
20.2%
0%
5%
10%
15%
20%
25%
US DM ex US EM Pan Asia Europe
S&P Low Volatility Indices Benchmark Indices
Annualized Volatility in Past 10 Years (Mar 2004 - Mar 2014)
-29.0%
-38.0%-42.4%
-33.3%
-43.5%-46.4%
-53.4%-57.9%
-49.3%
-55.5%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
US DM ex US EM Pan Asia Europe
S&P Low Volatility Indices Benchmark Indices
12-Month Max Drawdown in Past 10 Years (Mar 2004 - Mar 2014)
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
REDUCING VOLATILITY EXPOSURE THROUGH S&P LOW VOLATILITY INDICES
10
• S&P Low Volatility indices generally had better absolute and risk-adjusted returns than their regional benchmarks in the past 10 years
Source: S&P Dow Jones Indices. Data from March 31, 2004 to March 31, 2014. The low volatility portfolios are presented by the S&P 500 Low Volatility, S&P Europe 350 Low
Volatility, S&P Pan Asia Low Volatility, S&P BMI International Developed Low Volatility and S&P Emerging Markets Low Volatility Indices. The regional benchmarks are presented by
the S&P 500, S&P Europe BMI, S&P Pan Asia BMI, S&P Developed ex US BMI and S&P Emerging Plus BMI. The S&P Low Volatility index data reflected in this chart may reflect
hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with
back-tested Index data and performance information.
9.0%
10.7%
15.0%
11.1% 11.6%
7.4% 7.7%
10.9%
6.4%
8.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
US DM ex US EM Pan Asia Europe
S&P Low Volatility Indices Benchmark Indices
Annualized Return in Past 10 Years (Mar 2004 - Mar 2014)
0.870.80
0.910.87
0.74
0.50
0.410.46
0.350.43
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US DM ex US EM Pan Asia Europe
S&P Low Volatility Indices Benchmark Indices
Risk-Adjusted Return in Past 10 Years (Mar 2004 - Mar 2014)
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 11
REDUCING VOLATILITY EXPOSURE
CONTROLLING VOLATILITY EXPOSURE
HEDGING VOLATILITY EXPOSURE
01
02
03 SUMMARY 04
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
CONTROLLING VOLATILITY EXPOSURE THROUGH S&P RISK-CONTROL INDICES
12
• S&P Risk Control Indices provide a way for investors to dynamically change the exposure to a particular market segment in order to control risk exposure at a desired target level.
• Through the S&P Risk-Control framework, investors have the option to choose
• an underlying index to gain exposure to the desired market segment
• a desired target volatility level to match their appetite for risk
• Example: S&P 500 Daily Risk-Control Indices
• The S&P 500 Risk Control Index seeks to maintain a target volatility by dynamically allocating weight between the S&P 500 and cash (overnight USD LIBOR) based on risk level (i.e. realized volatility of the S&P 500).
• The risk-control index increases its allocation to cash when the risk level is too high, and uses leverage (limited to 150%) when the risk level is too low.
• The target risk levels available for this index series are 5%, 7.5%, 10%, 12% and 15%. Exposure to the underlying index and cash is adjusted on a daily basis.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
CONTROLLING VOLATILITY EXPOSURE THROUGH S&P RISK-CONTROL INDICES
13
The index dynamically adjusts equity exposure based on its realized volatility to control target risk exposure
• When volatility increases, the risk control index moves out of the underlying index and into cash.
• When volatility decreases, the risk control index moves more into the underlying index and out of cash.
• When the volatility of the underlying index falls below the target levels, the exposure to the index could be leveraged
Source: S&P Dow Jones Indices. Charts are provided for illustrative purposes.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
CONTROLLING VOLATILITY EXPOSURE THROUGH S&P RISK-CONTROL INDICES
14
S&P 500 RC 5% RC 7.5% RC 10% RC 12% RC 15%
Max 30.4% 5.3% 7.6% 10.5% 12.7% 15.9%
Min 5.9% 2.5% 3.8% 5.1% 6.1% 7.7%
Median 14.2% 3.8% 5.7% 7.6% 9.0% 11.2%
Target 5.0% 7.5% 10.0% 12.0% 15.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%Rolling 12-Month Annualized Volatilityin Past 10 Years (Mar 2004 - Mar 2014)
Source: S&P Dow Jones Indices. Data from March 31, 2004 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the
Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
70
90
110
130
150
170
190
210
230
250
3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14
S&P 500 RC 5% RC 7.5% RC 10% RC 12% RC 15%
Total Return Performance in Past 10 Years(Mar 2004 - Mar 2014)
CONTROLLING VOLATILITY EXPOSURE THROUGH S&P RISK-CONTROL INDICES
15
Index S&P 500 RC 5% RC 7.5% RC 10% RC 12% RC 15%
Annualized Return 7.4% 4.3% 5.8% 6.5% 7.4% 8.7%
Annualized Volatility 16.2% 4.0% 5.8% 8.0% 9.6% 12.0%
Risk-Adjusted Return 0.46 1.07 0.99 0.82 0.77 0.73
12-Month Max Drawdown -46.4% -6.6% -9.5% -14.1% -17.3% -22.0%
Source: S&P Dow Jones Indices. Data from March 31, 2004 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the
Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 16
REDUCING VOLATILITY EXPOSURE
CONTROLLING VOLATILITY EXPOSURE
HEDGING VOLATILITY EXPOSURE
01
02
03 SUMMARY 04
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
17
Allocates the majority of weightings to the S&P 500® Total Return Index when volatility is low
Allocates part of the weightings to the S&P 500® VIX Short-Term Futures Total Return Index to provide a “volatility hedge” when volatility is high
Shifts 100% weighting to an interest-bearing cash investment when the index loses more than 2% in a week (stop loss)
Equity
S&P 500
Volatility
VIX Futures
Cash
O/N LIBOR
• Implied equity volatility has historically had a strongly negative correlation to equity market returns and is considered a useful tool to hedge against the potential downside of the broad equity market.
• The S&P 500 Dynamic VEQTOR Index dynamically allocates between equity, volatility and cash in order to hedge equity portfolio tail risk.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
18
Volatility Equity Allocator
VEQTOR
Implied Volatility
Trend
Realized Volatility
Equity
S&P 500 Weight: 60-97.5%
Cash
O/N LIBOR Volatility
VIX Futures Weight: 2.5-40%
No Yes STOP LOSS
Source: S&P Dow Jones Indices. Charts are provided for illustrative purposes.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
19
• The index allocates weightings between equity and volatility based on signals generated from Realized Volatility and Implied Volatility
• Realized volatility is classified into 5 bands based on 1-month realized volatility of S&P 500 index
• Implied volatility trend is established if the following conditions on VIX remain for 10 consecutive days or more:
• 5-day MA above 20-day MA Implied Volatility Uptrend
• 5-day MA below 20-day MA Implied Volatility Downtrend
• Otherwise No Implied Volatility Trend
• Signals and trends are reviewed daily, allocation may change on a less frequent basis.
S&P 500 VIX Futures S&P 500 VIX Futures S&P 500 VIX Futures
Less than 10% 97.50% 2.50% 97.50% 2.50% 90.00% 10.00%
10% ≤ RV < 20% 97.50% 2.50% 90.00% 10.00% 85.00% 15.00%
20% ≤ RV < 35% 90.00% 10.00% 85.00% 15.00% 75.00% 25.00%
35% ≤ RV ≤ 45% 85.00% 15.00% 75.00% 25.00% 60.00% 40.00%
More than 45% 75.00% 25.00% 60.00% 40.00% 60.00% 40.00%
Realized Volatility
(RV)
Implied Volatilty Downtrend No Implied Volatilty Trend Implied Volatilty Uptrend
Target Equity / Volatility Index Allocation
Source: S&P Dow Jones Indices. Charts are provided for illustrative purposes.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
20
Allocation History
VEQTOR allocation to equity:
Median = 90%
Mean = 83%
Under stressed market environment, allocation to equity may decline to as low as 60%.
• Sep – Dec 2008
• August 2011
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
21
• If the index loses more than 2% in 5 days, the index allocates 100% weighting to cash position. Weightings of both equity and volatility components are zero
• Once the 5-day index performance is greater than -2.0%, the index will allocate weightings back to equity and volatility components in accordance with the previous steps described.
• Average duration in cash position = 2.39 days
STOP LOSS
Stop Loss Mechanism
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
60
110
160
210
260
310
12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13
S&P 500 S&P 500 VEQTOR
Total Return Performance(Dec 2005 - Mar 2014)
10/9/2007
3/9/2009
9/15/2008
10/16/2008 10/9/2007
4/2/2012
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
22
Compared to S&P 500, VEQTOR had smaller return drawdown and faster recovery historically.
S&P 500
Total Return
S&P 500 Dynamic
VEQTOR Index Total
Return
Maximum Draw Down -55.25% -17.90%
Index Value 1095.04 112477.80
Date 9-Mar-09 15-Sep-08
Previos Peak Value 2447.03 137005.24
Date 9-Oct-07 9-Oct-07
Recovery Value 2449.08 140308.26
Date 2-Apr-12 16-Oct-08
#Days to Recover 1120 31
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
Index S&P 500
Annualized Return 6.0%
Annualized Volatility 15.8%
Risk-Adjusted Return 0.38
12-Month Max Drawdown -46.4%
S&P 500 VEQTOR
11.1%
13.3%
0.83
-11.2%
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
HEDGING VOLATILITY EXPOSURE THROUGH S&P 500 DYNAMIC VEQTOR INDEX (VEQTOR)
23
Month S&P 500 S&P 500 VEQTOR
Oct-11 10.9% 3.9%
Apr-09 9.6% 4.4%
Sep-10 8.9% 5.0%
Mar-09 8.8% 11.6%
Jul-09 7.6% 5.8%
Jul-10 7.0% 0.3%
Dec-10 6.7% 3.0%
Mar-10 6.0% 4.9%
Nov-09 6.0% 3.2%
May-09 5.6% 4.3%
Jan-13 5.2% 2.0%
Jul-13 5.1% 2.3%
Apr-08 4.9% 0.2%
Oct-13 4.6% 1.4%
Feb-14 4.6% 3.7%
Jan-12 4.5% 2.9%
Apr-07 4.4% 3.7%
Feb-12 4.3% 4.1%
Jun-12 4.1% 1.7%
Oct-10 3.8% 0.8%
Average 6.1% 3.5%
Max 10.9% 11.6%
Min 3.8% 0.2%
20 Biggest S&P 500 Monthly Gain
(Dec 2005 - Mar 2014)
Month S&P 500 S&P 500 VEQTOR
Oct-08 -16.8% 26.4%
Feb-09 -10.6% -5.5%
Sep-08 -8.9% 4.5%
Jun-08 -8.4% -5.1%
Jan-09 -8.4% -1.6%
May-10 -8.0% -2.2%
Nov-08 -7.2% 4.2%
Sep-11 -7.0% 2.6%
May-12 -6.0% -2.2%
Jan-08 -6.0% -4.2%
Aug-11 -5.4% 10.5%
Jun-10 -5.2% -4.5%
Aug-10 -4.5% -3.9%
Nov-07 -4.2% -0.1%
Jan-10 -3.6% -4.1%
Jan-14 -3.5% -3.2%
Feb-08 -3.2% -2.8%
Jul-07 -3.1% -0.5%
Aug-13 -2.9% -2.6%
May-06 -2.9% 1.0%
Average -6.3% 0.3%
Max -2.9% 26.4%
Min -16.8% -5.5%
20 Biggest S&P 500 Monthly Loss
(Dec 2005 - Mar 2014)
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 24
REDUCING VOLATILITY EXPOSURE
CONTROLLING VOLATILITY EXPOSURE
HEDGING VOLATILITY EXPOSURE
01
02
03 SUMMARY 04
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
25
Dec 2005 - Mar 2014 S&P 500
S&P 500 Low
Volatility
S&P 500
VEQTOR
S&P 500
Daily RC 5%
S&P 500
Daily RC
7.5%
S&P 500
Daily RC 10%
S&P 500
Daily RC 12%
S&P 500
Daily RC 15%
Annualized Return 7.2% 9.1% 13.4% 4.3% 6.0% 6.7% 7.7% 9.0%
Annualized Volatility 15.8% 11.2% 13.3% 4.0% 5.8% 8.0% 9.6% 11.9%
Risk-Adjusted Return 0.46 0.81 1.01 1.08 1.02 0.84 0.80 0.76
12-Month Max Drawdown -46.4% -29.0% -11.2% -6.6% -9.5% -14.1% -17.3% -22.0%
60
110
160
210
260
310
12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13
S&P 500
S&P 500 Low Volatility
S&P 500 VEQTOR
S&P 500 Daily RC 5%
S&P 500 Daily RC 7.5%
S&P 500 Daily RC 10%
S&P 500 Daily RC 12%
S&P 500 Daily RC 15%
Total Return Performance(Dec 2005 - Mar 2014)
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
26
S&P 500S&P 500
Low Vol
S&P 500
VEQTORRC 5% RC 7.5% RC 10% RC 12% RC 15%
Max 30.4% 20.6% 30.5% 5.3% 7.6% 10.5% 12.7% 15.9%
Min 5.4% 3.3% 3.7% 2.5% 3.8% 5.1% 6.1% 7.7%
Median 13.8% 9.5% 10.6% 3.8% 5.7% 7.5% 9.0% 11.1%
Target 5.0% 7.5% 10.0% 12.0% 15.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Rolling 12-Month Annualized Volatilityin Past 10 Years (Dec 2005 - Mar 2014)
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
27
Year S&P 500
S&P 500 Low
Volatility
S&P 500
VEQTOR
S&P 500
Daily RC 5%
S&P 500
Daily RC
7.5%
S&P 500
Daily RC 10%
S&P 500
Daily RC 12%
S&P 500
Daily RC 15%
2006: Return 15.8% 19.7% 14.1% 10.7% 13.4% 16.1% 18.3% 20.3%
Annualized Volatility 5.6% 3.7% 3.7% 2.9% 4.5% 5.9% 7.1% 8.4%
2007: Return 5.5% 0.6% 17.2% 5.1% 5.2% 4.5% 4.7% 5.0%
Annualized Volatility 9.7% 8.1% 9.2% 3.9% 5.8% 7.8% 9.1% 11.0%
2008: Return -37.0% -21.4% 21.3% -5.0% -7.9% -12.1% -14.9% -19.0%
Annualized Volatility 21.0% 16.7% 28.8% 3.5% 5.1% 7.0% 8.4% 10.5%
2009: Return 26.5% 19.2% 26.0% 5.8% 8.9% 11.4% 13.7% 17.2%
Annualized Volatility 22.3% 15.4% 15.4% 3.1% 4.5% 6.1% 7.3% 9.2%
2010: Return 15.1% 13.4% -0.5% 5.0% 7.6% 9.8% 11.7% 14.5%
Annualized Volatility 19.3% 11.7% 11.4% 5.0% 7.6% 10.1% 12.2% 15.3%
2011: Return 2.1% 14.8% 17.4% -0.7% 0.2% -1.9% -2.5% -3.4%
Annualized Volatility 15.9% 8.7% 12.1% 4.6% 5.9% 9.3% 11.1% 13.9%
2012: Return 16.0% 10.3% 3.5% 3.7% 5.6% 7.2% 8.5% 10.5%
Annualized Volatility 10.5% 6.0% 6.7% 3.5% 5.3% 6.9% 8.3% 10.4%
2013: Return 32.4% 23.6% 14.3% 12.1% 18.7% 25.1% 30.7% 39.3%
Annualized Volatility 8.5% 11.1% 4.8% 3.5% 5.3% 7.1% 8.6% 10.8%
2014 Jan-Mar: Return 1.8% 3.3% 1.2% 0.1% 0.1% 0.1% 0.1% 0.2%
Annualized Volatility 13.9% 11.2% 12.0% 5.6% 8.8% 11.2% 13.4% 16.6%
2005 Dec - 2014 Mar:
Annualized Return 7.2% 9.1% 13.4% 4.3% 6.0% 6.7% 7.7% 9.0%
Annualized Volatility 15.8% 11.2% 13.3% 4.0% 5.8% 8.0% 9.6% 11.9%
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
28
-16.8%
-12.8%
-5.5%
-3.1%
-3.4%
-6.3%
-7.5%
-9.4%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
10 9 8 7 6 5 4 3 2 1
S&P 500
S&P 500 Low Volatility
S&P 500 VEQTOR
S&P 500 Daily RC 5%
S&P 500 Daily RC 7.5%
S&P 500 Daily RC 10%
S&P 500 Daily RC 12%
S&P 500 Daily RC 15%
10 Biggest Monthly Loss (Dec 2005 - Mar 2014)
10.9%
5.9%
26.4%
2.2%
3.4%4.5%5.4%
6.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1 2 3 4 5 6 7 8 9 10
S&P 500
S&P 500 Low Volatility
S&P 500 VEQTOR
S&P 500 Daily RC 5%
S&P 500 Daily RC 7.5%
S&P 500 Daily RC 10%
S&P 500 Daily RC 12%
S&P 500 Daily RC 15%
10 Biggest Monthly Gain (Dec 2005 - Mar 2014)
Source: S&P Dow Jones Indices. Data from Dec 31, 2005 to March 31, 2014. Data reflected in this chart may reflect hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index data and performance information.
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
PRACTICAL VOLATILITY MANAGEMENT THROUGH AN ARRAY OF INDICES
29
Index S&P Low Volatility S&P Risk Control S&P 500 VEQTOR
Volatility Management
Approach
Reducing risk exposure through
stock selection and alternative
weighting
Controlling risk exposure at target
levels through varying exposures
to equities and cash
Hedging potential downside risk by
dynamic allocation among equities,
volatility and cash
Underlying Assets 100% in equitiesUnderlying assets:
Equities & Cash
Underlying assets:
Equities, VIX futures & Cash
Fixed-Volatility Target No Yes No
Stop-Loss Feature No No Yes
Rebalancing Frequency Quarterly Daily/Monthly Daily
Historical VolatilityMostly less volatile than the
benchmark
Mostly fluctuated tightly around
and below target volatility level
Mostly less volatile than the benchmark
and swang in a wide band
Strong equity bull market
Participated in the uptrend
market with a lag as the index has
low beta by design
Participated in the uptrend
market; led or lagged depending
on volatility target
Participated in the uptrend market with
underformance as suffered from cost of
hedging
Strong equity bear marketMostly outperformed; declined
with reduced drawdown
Mostly outperforms; declined with
reduced drawdown depending on
volatility target
Mostly outperformed; profit from
hedging neutralized losss from equities
Flat or choppy market Slightly outperformed or even Slightly outperformed or evenMostly underperformed due to hedging
cost
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PERFORMANCE DISCLOSURE
30
The S&P 500 Low Volatility Index was launched on April 20, 2011. The S&P BMI International Developed Low Volatility Index and the S&P BMI Emerging Markets Low Volatility Index were launched on December 15, 2011
The S&P Europe 350 Low Volatility Index was launched on August 21, 2012. The S&P Pan Asia Low Volatility Index was launched on November 26, 2012.. All information presented prior to the Launch Date is back-tested.
Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect on the Launch Date. Complete index methodology details are
available at www.spdji.com.
The S&P 500 Daily Risk Control 10% Index was launched on May 13, 2009. The S&P 500 Daily Risk Control 5% Index and S&P 500 Daily Risk Control 15% Index were launched on September 10, 2009. The S&P 500 Daily
Risk Control 12% Index was launched on April 21, 2010. The S&P 500 Daily Risk Control 7.5% Index was launched on May 3, 2013. All information presented prior to the Launch Date is back-tested. Back-tested
performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect on the Launch Date. Complete index methodology details are available at
www.spdji.com.
The S&P 500 Dynamic VEQTOR Index was launched on November 18, 2009, at market close. All information presented prior to the Launch Date is back-tested. Back-tested performance is not actual performance, but is
hypothetical. The back-test calculations are based on the same methodology that was in effect on the Launch Date. Complete index methodology details are available at www.spdji.com.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a calculated value (either live or back-tested) for a given
index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live; index values provided for
any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the
public, for example via the company’s public Web site or its data-feed to external parties. For Dow Jones-branded indices introduced prior to July 31, 2013, the Launch Date (which prior to July 31, 2013, was termed “Date of
Introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index’s public release date.
Past performance is not an indication of future results. Prospective application of the methodology used to construct the indices may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the index. Please refer to the methodology paper for the index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. It is not possible to invest directly in an Index.
Also, another limitation of hypothetical information is that generally the index is prepared with the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.
The index returns shown do not represent the results of actual trading of investor assets. S&P Dow Jones Indices maintains the indices and calculates the index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back-tested performance to be lower than the performance shown. In a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% were imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).
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GENERAL DISCLAIMER
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31
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Priscilla Luk
Global Research & Design
S&P Dow Jones Indices
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