In times of volatility, managed-risk strategies have become very popular. Institutions have been using these strategies for a long time, and thanks to the ETF vehicle they are now accessible to financial advisors and end investors. Irma Bribiesca, who is the director of ETF strategy and product management for Transamerica Asset Management, has been at the forefront of designing and building those strategies.
I spoke with Irma on February 12 at the Inside ETF conference in Hollywood, FL.
Tell me a little bit about yourself and your role at Transamerica.
I came to Transamerica over 18 months ago. Transamerica wanted to enter the ETF space, which is an industry that has become more prevalent in investors' minds over the past few years. My role is to develop and help guide the franchise for them. I'm part of a team that is behind this initiative at Transamerica.
We've seen a dramatic increase in market volatility over the past year. What do you think investors need to be watching most closely?
There are a few things on our short list. One is the growth in the U.S. and the global economies, followed by the Fed’s monetary policy, corporate earnings growth, trends in the credit markets, the ongoing trade dispute with China and geopolitical uncertainties. All of these areas were concerns in the markets, particularly for the last quarter of last year, and their potential resolutions will play a significant role in the year ahead.
What is your overall assessment of the opportunities and the risks for 2019?
Markets were oversold towards the end of last year. Overall growth in the U.S. economy and corporate earnings, while not likely to be as strong in the year ahead as they were last year, can still provide a favorable backdrop for equity investors in 2019. We don't expect any interest rate hikes by the Fed until at least the second part of this year. We think the market should view this as positive.
Bond investors can take advantage of higher yields and credit spreads through higher quality segments of the corporate market.
As for the U.S. and China trade talks, our opinion is that it remains the most significant roadblock investors’ face this year. Should they reach an agreement on the tariffs, it will be likely positive for stocks into this year and next year.
I want to come back to Managed Risk. What is it about Managed Risk – in particular, the DeltaShares Managed Risk ETFs – that investors need to know given this environment?
If there is one thing that has come back to investors’ outlooks, it is that traditional levels of volatility have returned to the market. Over the past few years, volatility has been pretty tame, based on different monetary policies. But now volatility is back. We think this highlights the need for investors to incorporate Managed Risk strategies into their allocations on a longer-term basis. Our Managed Risk products can help them to potentially realize equity-like returns in rising markets with a better downside risk profile during market declines.
Let's dig in here. What is the premise behind Managed-Risk investing? How does it work?
These strategies are designed to follow a dynamic rules-based approach consisting of portfolio allocation across three assets: equity, 5- year treasury bonds and 3m T-Bills.
As we know, historically there has been an inverse correlation between volatility and stock returns. Therefore, Managed Risk strategies allocate more towards stocks and away from Treasury bonds when volatility declines or remains low, and allocate away from stocks and into Treasury bonds when volatility rises or stays high.
I think an essential feature of these ETFs is during periods of prolonged low volatility, like what we saw in 2017, these ETFs can remain fully allocated to stocks, allowing investors to benefit from rising markets.
Your Managed-Risk strategies can have an equity allocation. Are they constrained to certain market capitalizations or geographic regions?
No, that is not the case. Volatility is something that exists across markets and asset classes, and as such these strategies can be applied to different segments of the market, large/mid or small-cap or different geographic regions. What is also interesting is that, since volatility and risk levels vary across different areas, investors can build managed-risk portfolios for different market segments and use them to achieve similar levels of diversification as traditional equity investments.
You speak with a lot of advisors. How are they combining Managed-Risk strategies with their traditional equity investing?
In the past few months, and actually in the past few years, we’ve seen an interest in understanding the need for Managed Risk. This represents an innovative approach in the way they're constructing portfolios. They're essentially carving out a portion of their diverse portfolio and allocating that to Managed Risk strategies, which can provide them the basis to understanding the risk that goes into their overall portfolios. Just like as you mentioned before, this is what Institutional clients have been doing for a long time. In other words, they are beginning to recognize the need for Managed-Risk strategies to be better positioned for sustained rising market volatility and its corresponding potential market declines. By mitigating downside during the worst stretches of a market cycle, long term total returns and risk-adjusted returns can be enhanced.
Stepping back, what is the key thing that advisors should take away about the opportunities in Managed-Risk ETFs?
We believe that Managed-Risk strategies can help investors and advisors to mitigate downside risk in the markets while also achieving higher risk-adjusted returns with lower overall portfolio volatility. The risk management is built into the structure of the ETF so investors and advisors can allocate them accordingly knowing that rules-based risk management will be systematically applied when it is needed most. Is like having a full-time safeguard on call monitoring your overall risk continuously.
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In times of volatility, managed-risk strategies have become very popular. Institutions have been using these strategies for a long time, and thanks to the ETF vehicle they are now accessible to financial advisors and end investors. Irma Bribiesca, who is the director of ETF strategy and product management for Transamerica Asset Management, has been at the forefront of designing and building those strategies. 