Volatility: Always be ready

Written by: Global Thought Leadership | September 29, 2017
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Source: Bloomberg, as of 8/31/2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. 

The Bottom Line

  • Stock market volatility has been muted lately, but that can change quickly, with little warning.
  • For investors who want to guard against a sudden downturn, the dilemma is how to do so without sacrificing near-term opportunity.
  • Low-volatility strategies built around dividend stocks represent an intriguing solution—because they allow investors to participate in long-term market gains without necessarily penalizing performance. 
  • Consider the S&P 500 Low Volatility High Dividend Index—composed of the 50 least volatile high dividend stocks in the S&P 500.  For the 10 years ending 8/31/17, it generated an average annual total return of 11.72—well above the 7.61% return for S&P 500 itself.1
  • And with a trailing 12-month dividend yield of 4.07% for the S&P 500 Low Volatility High Dividend Index compared with just 1.98% for the S&P500, “a low-vol hi-div” approach could offer a measure of comfort for clients who want income but are concerned about volatility given current valuations and political/policy risks.
  • Indeed, Legg Mason’s multi-asset manager QS Investors, which runs several strategies in this area, makes a compelling case that “low-vol/high div” deserves a dedicated allocation in a well-diversified portfolio—because it allows investors to stay ready for volatility, whenever it may come.

 


1 Source for all data is Bloomberg.

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IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.