Weather market volatility with a diversified MinRisk approach
As market uncertainty and volatility rise on the back of political tensions, many investors are looking for strategies that reflect a more cautious stance. In this article, Marek Siwicki, Executive Director, explains how Quoniam’s Equities MinRisk approach can provide a diversifying element to an investor’s portfolio.
Marek Siwicki,
Executive Director
At the end of the first quarter of 2025, we reflect on a volatile few months since the inauguration of President Trump.
For global equity markets, the drivers have been, as they have been for the past few years, the largest publicly traded companies in the US, commonly referred to as the “Magnificent Seven”. As Mark Frielinghaus shows in our quarterly update, volatility is on the rise and sentiment is shifting.
But some investment solutions are designed to help investors weather these bouts of volatility. At Quoniam, our Global MinRisk solution is designed to do just that, helping investors to smooth their equity exposure with a diversified portfolio that invests in a more risk-managed way, giving more exposure to lower-risk names.
From 1 January 2025 to 31 March 2025, the MSCI World Index hedged to the euro is down by -2.8%. But the Quoniam Global MinRisk euro hedged strategy is +1.4% over the same period.
As a systematic asset manager, a diversified portfolio is key to our investment thesis. MinRisk investing, unlike more traditional active equity investing, is less concerned with a portfolio’s tracking error/relative risk to the index and more concerned with the overall absolute volatility of the portfolio. A MinRisk portfolio will tend to be more diversified in terms of single name exposure and will experience around 20% to 30% less absolute volatility than a more traditional tracking error driven strategy.
When a MinRisk solution is combined with a more traditional solution, it can offer some real diversification benefits, particularly in times of market stress.
Marek Siwicki,
Executive Director
The chart below shows the performance profile of Quoniam’s Global MinRisk portfolio relative to the market cap index during periods of stress, and you can clearly see how the MinRisk portfolio can protect performance. The year-to-date performance shows that MinRisk has performed well in a positive but volatile market:
In particular, two systematic factors in factor models should – if properly formulated – capture this information.
Quoniam Global MinRisk vs MSCI World Index in negative market periods
The MinRisk approach to investing comes at a cost; in recent years, a market-cap portfolio with full exposure to these large mega-cap names would have given investors a better overall level of return. This is why at Quoniam, we emphasise to investors that a minimum risk approach can be applied in a number of different ways.
Investors who are not tied to a benchmark index for their own performance measurement purposes may prefer to take a more cautious approach to investing and therefore a more diversified portfolio such as MinRisk could be a suitable alternative. This depends very much on the investor’s risk tolerance.
Also, those investors who wish to allocate a portion of their assets to something defensive, which would help protect their absolute performance in a downturn, could add a portion of their allocation to this strategy as a buffer to their performance in these periods of heightened volatility.
David Jenkins from Brunel Pension Partnership, a large investor into this type of strategy provides comment below on why they utilise this strategy within their portfolio:
‘As a significant investor into global equity markets, we have some overarching concerns around the concentration levels we have seen to individual stocks. Traditional market capitalisation portfolios have become increasingly driven by a few stocks and we feel it is worth diversifying away from the concentration risk. We have employed two asset managers within our Defensive Global equity portfolio to provide some balance against this risk and provide downside protection during periods of market drawdown, in a cost-effective manner. As long-term investors, we recognise that having equity exposure is key and that there will be short term market environments in which this strategy underperforms. However, during times of heightened market volatility this strategy should provide sufficient capital protection that ensures the strategy will have a much smoother performance journey over the longer term.’
As a case study example, we look to the emerging markets. Over the last 4 years we have seen the Quoniam Equities MinRisk Emerging Markets strategy outperform the MSCI EM index by over 6.7% per annum to the end of December 2024. This is against the backdrop of a decrease in concentration in the large tech stocks that were driving those markets prior to 2020.
Conclusion
If we were to see a similar pattern of the large mega caps in the US start to decline in their share of the overarching global index, or other geopolitical risks come to the fore, then we could see strong relative performance from a global MinRisk portfolio.
As part of a diversified portfolio that seeks to maintain equity exposure, an allocation to a MinRisk strategy can offer a cushion in those times of heightened volatility and help protect the absolute performance.
