Risk-Averse Investors Do Better In Times Of High Volatility: SG

Risk averse portfolios

It’s time to adopt a risk averse stance and protect your investments, argues a new report from Societe Generale SA (OTCMKTS:SCGLY) (EPA:GLE)’s Cross Asset Research Division. Their Q-MAP (qualitative multi-asset portfolio) model found that investors with a risk averse portfolio did better during times of high global volatility than dynamic (high risk) and intermediate strategies.

“With many equity markets trading near all-time peaks (U.S., U.K. and Germany) and bond yields still close to historical lows, we think investors should brace for headwinds ahead of Fed tapering and more disappointment from China,” writes Societe Generale SA (OTCMKTS:SCGLY) (EPA:GLE). “We raise Cash, the most defensive asset, to 20 percent of our Multi-Asset Portfolio.”

Societe Generale recommends cash, Japanese assets, euro credit and commodities

They recommend investing in cash because it has low volatility and Japanese assets because they are uncorrelated from much of the action creating this volatility, with euro credit and commodities rounding out the portfolio. Risk-neutral investors should instead focus on U.S. equities (30 percent of the total portfolio) with significant investments in European equities, European government bonds, and U.K. government bonds.

While the report advises against a dynamic, high-risk profile, they still gave their best recommendations for investors who are looking for a chance at bigger returns. According to SG’s Q-MAP, a riskier profile should be comprised mostly of equities (70 percent) along with emerging market assets, British equities, and European government bonds.

Societe Generale SA (OTCMKTS:SCGLY) (EPA:GLE) doesn’t recommend U.S. fixed-income assets no matter what risk profile an investor decides to use when building their portfolio.

Risk averse portfolios

Risk in EM and Treasuries not recommended

Societe Generale SA (OTCMKTS:SCGLY) (EPA:GLE) found that the risk-reward profile for emerging market and U.S. Treasury bonds have gotten worse, while equities have gotten stronger since December 2012. The risk-reward profile for cash has remained steady, as one would expect from an asset that is being recommended for its low volatility.

Risk-reward has also increased slightly for dividends, Japanese equities, and U.S. equities, while commodities, Japanese government bonds, and U.K. government bonds have all become much less attractive.

The SG Q-MAP model is a stochastic model (Markowitz-based approach) that uses historical trends to predict futures returns for risk averse, risk-neutral, and dynamic investors. It attempts to find the optimal distribution of assets for each type of portfolio and then predict which portfolio will have the best performance given existing economic conditions.

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About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.

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