Using Asymmetric Risk to Improve Client Outcomes: A deep dive on equity risk

In some ways, asymmetric risk or asymmetric return is a goal of every investment decision - - can I participate in the upside of an investment while protecting on the downside? Some of the original Ben Graham value analysis was intended to help achieve this exact contour of outcome in creating “moats of protection” for downside resilience in individual security selection by choosing value priced securities that also had pricing, scale, brand, patent or other economic protections. This research extends that concept to active equity mutual fund manager selection and is aimed at finding the active managers who may offer an asymmetric advantage in client outcomes. Can we identify managers who are more likely to deliver an asymmetric outcome - - with full or at least significant participation in up market movements paired with some protection during periods of market decline. While passive or index strategies are by definition perfectly symmetrical - - anchored in full market replication with 100% up capture and 100% down capture, it is possible to find active managers who have consistently maintained an asymmetric risk/return result with higher upside and/or lower downside capture. Normally we also think of risk and return as equal and paired trade offs in an investment decision - - if we want to achieve a greater return we must accept greater risk and if we desire lower risk it comes along with reduced return expectations. But what if we could identify managers who had consistently achieved higher returns than peers or their benchmark and did it at reduced risk levels as measured by volatility? This research examines and highlights some of these risk metrics in manager selection and the potential benefits of selecting managers who are more risk aware and downside resilient in their approach. This focus on downside protection may be particularly valuable as we are currently in a market with CAPE Schiller PE and Buffet indicator levels not seen since 1929 and 1999.