The Pension Protection Fund (PPF) has appointed Legal & General Investment Management (LGIM) to implement a FTSE RAFI Low Volatility strategy which aims to increase risk-adjusted returns through both improved performance and reduced risk.
The smart beta strategy is designed to measure the performance of a basket of low volatility stocks screened for value. It employs a fundamental weighting methodology whereby constituent weights are determined using fundamental measures of company size rather than market capitalisation. The strategy’s rules-based construction seeks to avoid overvalued stocks while diversifying across sectors and countries. In addition, it breaks the link between portfolio weight and price by using fundamental measures of company size. This results in a portfolio that has lower turnover and higher liquidity and capacity. The FTSE RAFI Low Volatility mandate is the first of its kind in Europe.
Caroline O’Shaughnessy, Global Head of Sales and Marketing for FTSE Russell, says: “For over ten years the FTSE RAFI partnership has developed innovative smart beta solutions that meet the increasingly sophisticated needs of market participants around the world. This global expertise is underpinned by FTSE Russell’s strong emphasis on replicability and governance. We are delighted that PPF has chosen one of our benchmarks for this mandate.”
Jason Hsu (pictured), Co-Founder and Vice Chairman, of Research Affiliates, says: “All investors are different and have varying needs. With many markets richly valued, some are looking for an efficient way to de-risk the equity exposures within their portfolios. For these investors, a low volatility approach—like the FTSE RAFI Low Volatility strategy—may make a lot of sense.”
Adam Willis, Head of Index Fund Distribution at LGIM, says: ‘In times of economic turbulence the strategy is designed to give surety and meet specific performance criteria required by the PPF. The strategy is the first of its kind in Europe at the moment and I would expect it to generate significant further interest.”