Aberdeen Standard Investments (ASI) and BNP Paribas have established a Global Risk Mitigation (GRM) Index to provide a route for institutional investors, such as pension funds and discretionary portfolio managers, to mitigate their equity risk and reduce portfolio volatility.
The Index, the composition of which is advised by ASI, aims to deliver a downside beta to equities of -0.2 or lower and generate a reasonable level of additional convexity in large equity market falls. This convexity means the Index should deliver stronger positive returns as the equity market decline increases. In addition, the Index has been designed to limit carry costs in rising/flat equity markets thereby making it easier for investors to retain the exposure in more benign environments.
ASI dynamically allocates across four discrete building blocks which include a number of underlying sub-indices published by BNP Paribas. Since the GRM index launched in Aug 2019 the average beta (versus the S&P 500) has been -0.21.
Despite this negative beta the Index was able to substantially protect its Q1 gains (+15.6 per cent) as equity markets subsequently recovered; returning 12.9 per cent YTD. BNPParibas also publishes a leveraged version of the ASI GRM Index which is up over 40 per cent YTD.
Russell Barlow, Global head of Alternative Investment Strategies at Aberdeen Standard Investments, comments: “Client interest in risk mitigation strategies has increased over the past few years. At the same time efficient implementation routes have been notoriously hard to identify. Given this, and based on our extensive experience in this area, we decided to solve for the challenges we identified ourselves. Our desire was to create an Index that would specifically address aspects such as liquidity, transparency, minimising carry costs and the delivery of a convex return profile without introducing path dependencies to the risk event.
“Through a significant amount of collaboration with BNP Paribas, the ASI Alternative Investment Strategies team have managed to create a new and innovative approaching to managing a client’s exposure to equity risk. The resulting GRM index now provides allocators with a risk mitigation route that will allow them to monetise their holding on any dealing day and also aims to minimise the impact of path dependency – by allocating to 30 underlying sub-strategies – and reduces carry cost though efficient active management.”
Narvir Brar, head of UK Equity Institutional sales at BNP Paribas, adds: “We are very pleased to help provide the infrastructure and Index calculation for ASI to have delivered such a strong return over the last year. We expect investors to whom a defensive/hedging portfolio position remains front of mind to consider the GRM index as a viable solution for their requirements.”