As of late last year, most asset owners (59%) felt that the asset management industry hadn’t stepped up with enough innovation in liability-driven investing strategies, according to a Natixis Global Asset Management survey.
At least one provider is looking to rectify that.
UBS has released a white paper detailing its new theory on wrapping volatility targets into a de-risking glide path, making dampened funded-status movements part of the driver for asset allocation, not just the intended outcome.
“The target funding ratio volatility model is the hands down winner across all seven time periods.”
The banking and asset management giant ran four test cases for a model plan: a classic 60/40 equities and bond portfolio, an asset glide path (AGP) that de-risked as funded status improved, an AGP with a target funding volatility overlay, and an AGP with a dynamic glide path-style volatility overlay.
The overlays—which UBS called “fairly straightforward,” “highly liquid, and inexpensive to trade”—comprised of S&P 500 and US Treasury futures.
The final test case, involving both an asset allocation glide path and dynamic funding volatility overlay, produced the best risk-adjusted returns for the June 2001-through-February 2015 backtest period.
“The target volatility overlay helped reduce the allocation to equities in 2008, which explains why its maximum drawdown is not as extreme as compared with the two asset allocation approaches,” wrote UBS advisor Neil Olympio and Head of Pension Risk Management Robert Guzman.
The authors acknowledged that this approach would likely underperform relative to a classic AGP in certain periods, particularly during strong and volatile equity bull markets.
“This is because the dynamic target funding ratio volatility portfolio could reduce equity exposure enough so that the AGP model portfolio would produce a better return,” Guzman and Olympio noted. “Even then, the results would have to be compared on a risk-adjusted basis.”
Interested in reading UBS Global Asset Management’s paper—“From Liability to Volatility Driven Investing”—in its entirety?