Last updated: 03:30 / Monday, 29 June 2015
Analysis by BNP Paribas IP

And What If Volatility Came Back to Town?

And What If Volatility Came Back to Town?

In the first half of 2015, investors faced a favourable environment, with crude oil prices far below the USD 110 a barrel level to many of us had become accustomed, a euro/US dollar exchange rate of USD 1.05 to USD 1.15 and – last but certainly not least – the announcement in January by the ECB of a full-blown programme of asset purchases (‘quantitative easing’). Reflecting the significance of this macroeconomic news (and the long-awaited signs of an economic recovery), valuations in many asset markets rose to historic highs – if they didn’t exceed them!

Is time for volatility to return?, asked Andrea Mossetto, senior investment specialist, Paris at THEAM, BNP Paribas IP.

After years of relatively calm and clear trends, mainly determined by the decisions of G3 central banks, 2015 might see volatility come back to town. On 3 June, after an abrupt rise in bond yields, ECB President Mario Draghi advised investors to “get used to periods of increased volatility.“

“Financial markets fluctuate in response to many factors including the economic outlook, geopolitical tensions and the policy decisions of central banks. Thus, worse-than-expected economic data and a resurgence of geopolitical concerns can quickly generate tensions and boost volatility. For this reason, monitoring the level of volatility in financial markets is of paramount importance to us”, point out Mossetto.

Isovol: An approach to mastering volatility

This is precisely what THEAM’s Isovol strategy enables BNP Paribas IP to do. By putting volatility back at the heart of portfolio management and defining the volatility of each asset in the portfolio as a fundamental criterion for asset allocating, this strategy is focused on mastering volatility and improving the participation in market trends, explained Mossetto. It bases investment management not solely on a manager’s judgments, but on a relatively simple signal: the volatility of the markets in which they invest.

Volatility-driven exposure can produce attractive results

“In terms of behaviour, in an Isovol strategy, rising markets are naturally being bought and volatile markets are underweighted. The result is a reduction in maximum losses in times of market turbulence. This explains the attractive performance of the strategy in recent years, but also an improved participation in the various uptrends. In recent years, THEAM’s Isovol management strategy has been effective in improving risk-adjusted returns”, said BNP Paribas IP´expert.

Investing in a flexible way, in a multi-asset class universe of international assets, broadly diversified via futures and index trackers, helps give investors a clear view of their exposure.

Thus, the Isovol strategy can be particularly suitable for investors seeking a straightforward and intuitive strategy targeting a stable level of volatility, without sacrificing performance.