Aberdeen Standard Investments (ASI) and BNP Paribas established its Global Risk Mitigation (GRM) Index to provide institutional investors, such as pension funds and discretionary portfolio managers with an effective route to mitigate their equity risk and reduce portfolio volatility. The index family was launched live in July 2019.
The GRM Index, the composition of which is advised by ASI, aims to deliver a downside beta to equities of -0.2 or lower and generate a reasonable level of additional convexity in large equity market falls. This convexity means the Index should deliver stronger positive returns as the equity market decline increases. In addition, the Index has been designed to limit carry costs in rising/flat equity markets thereby making it easier for investors to retain the exposure in more benign environments. This investment objective is achieved by ASI dynamically allocating across four discrete building blocks namely; First Risk, Tail Risk, Trend and Defensive factors. Each of the four discrete blocks includes a number of underlying sub-indices published by BNP Paribas.
Since launch, the GRM index average beta (versus the S&P 500) has been -0.21*.
During 2020, the respective indices delivered:
GRM = +11.48%
GRM x3 = +36.30%
The allocation to the First Risk and Tail Risk blocks, typically made up of long volatility strategies, enabled the index to achieve high convexity during the Covid-19 sell-off earlier last year. During the sell-off period the x3 leveraged version returned +62.1% (Feb 19th – March 18th 2020), whilst the S&P500 lost 29.2%.
The active management of the index meant that a large proportion of the performance in the sell-off was retained when volatility and equity markets normalised after the first quarter 2020. Between the end of the sell-off and the start of Q4, the x3 leveraged index lost 12.3% while the S&P recovered by over 40%. Then, going into the final quarter of 2020 the Trend and Defensive blocks within the index performed well, resulting in the x3 leveraged index only declining by 2.0% while equities rallied 7.3%.
This asymmetric profile in rising markets was especially noticeable in December, where despite equity markets gaining 3.7%, the x3 leveraged index returned a positive performance of 1.06%. The realised index return illustrated the benefits of active management. When volatility levels reset lower last year the index allocation of weights shifted from the First and Tail Risk blocks to the Defensive and Trend factors which perform better in more stable environments.
The complementary nature of the GRM index to a portfolio of equity holdings was very clear during 2020.
An index comprised of 100% GRM + 100% MSCI World would have returned +33.7%** this year.
An index comprised of 100% GRM x3 + 100% MSCI World would have returned +70.7%** this year
Various investment vehicles are available for investors to access the index including a daily dealing Irish domiciled fund.
Russell Barlow, Global Head of Alternative Investment Strategies at Aberdeen Standard Investments, comments: “The ASI Risk Mitigation Index is an extremely efficient tool that provides allocators with a range of access route to the strategy. These include an overlay on top of an existing equity allocation through to a tactical tool that an allocator can use when looking to increase their defensive positioning without the need to worry about timing a market top.
“2020 was clearly a test for any hedging strategy; however, the robust performance of GRM during the COVID crisis demonstrated we passed that test. In addition to this hedging strategies were also tested on their ability to retain these gains during the subsequent market recovery. It was GRM’s ability to deliver on both these aspects that clearly established the merits of our programme. The GRM index provides an allocator with an efficient alternative to a rolling put strategy; delivering a comparable level of downside protection during a crisis but at a much lower cost of ownership in the intervening periods.”
Narvir Brar, Head of UK Equity Institutional sales at BNP Paribas commented: “We are very pleased with the investment performance during 2020, the team at ASI worked diligently to not only ensure the portfolio was well balanced to capture profits during the Q1 equity sell off but also to retain much of the gains during the rest of the year. Indeed since the floor in MSCI World on 23rd March 2020, the GRM x3 index lost -11% compared with a 70% gain in the MSCI World, this comes after capturing returns in Q1 in excess of the negative decline in global equity markets”
*Source: Performance data is taken from Bloomberg unless specified otherwise. Past performance is not an indicator of future performance.
**Source: BNP Paribas. The GRM + MSCI World is an automatically re-balanced index to target (equal) weights quarterly.
Aberdeen Standard Investments
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Notes to editors
About Aberdeen Standard Investments
- Aberdeen Standard Investments (ASI) is a leading global asset manager dedicated to creating long-term value for our clients, and is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
- With over 1,000 investment professionals we manage £511.8 billion (as at 30 June 2020) of assets worldwide. We have clients in 80 countries supported by 50 relationship offices. This ensures we are close to our clients and the markets in which they invest.
- We are high-conviction; long-term investors who believe teamwork and collaboration are the key to delivering repeatable, superior investment performance. We are resolute in our commitment to active asset management.
- ASI is the asset management business of Standard Life Aberdeen plc, one of the world’s largest investment companies.
- Standard Life Aberdeen plc is headquartered in Scotland. It has around 1.2 million shareholders and is listed on the London Stock Exchange. The Standard Life Aberdeen group was formed by the merger of Standard Life plc and Aberdeen Asset Management PLC on 14 August 2017.
- ASI GRM Index: Bloomberg Ticker ENHAGRM1 Index
- ASI GRM x3 Index: Bloomberg Ticker ENHAGRM3 Index
About BNP Paribas
BNP Paribas is a top-ranking bank in Europe with an international profile. It operates in 71 countries and has almost 199 000 employees, including more than 151 000 in Europe. The Group ranks highly in its three core areas of activity: Domestic Markets and International Financial Services (whose retail banking networks and financial services are grouped together under Retail Banking & Services) and Corporate & Institutional Banking, centred on corporate and institutional clients. The Group helps all of its clients (retail, associations, businesses, SMEs, large corporates and institutional) to implement their projects by providing them with services in financing, investment, savings and protection. In Europe, the Group has four domestic markets (Belgium, France, Italy and Luxembourg) and BNP Paribas Personal Finance is the leader in the field of consumer lending in Europe. BNP Paribas is also rolling out its integrated retail banking model across the Mediterranean countries and in Turkey and Eastern Europe and has a large network in the western part of the United States. In its Corporate & Institutional Banking and International Financial Services activities, BNP Paribas enjoys leading positions in Europe, a strong presence in the Americas and has a solid and fast-growing network in the Asia/Pacific region.
The methodology of and rules governing the index (the “Index Methodology” and the “Index”) are proprietary and may not be disclosed or disseminated without the permission of the sponsor of the Index (the “Index Sponsor”). None of the Index Sponsor, the index calculation agent (where such party is not also the Index Sponsor, the “Index Calculation Agent”) nor, where applicable, the index Investment Advisor (the “Index Investment Advisor”) guarantee that there will be no errors or omissions in computing or disseminating the Index.
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