The Seeyond Asia MinVol Equity Income Fund, which launched in January, aims to outperform the MSCI AC Asia ex-Japan Dividend Net Reinvested Index over a five-year period while promising income and reduced volatility.
“All in all, we look to reduce volatility by 30%, compared to the index, and we don’t have any precise objective in terms of dividend yield, but we think we could reach 150% of the market dividend yield”, said Just.
The fund’s dividend yield as of April is 4.3% vs 2.2% for the index, according to the fund factsheet.
Nicolas Just, Seeyond
Just, who is based in Paris, told FSA that the team selects stocks based on risk profiles rather than fundamentals. They look at the one-year historical volatility and correlation of the stocks within the portfolio.
“If we look at 150 stocks, we will be looking at the correlation of any stock with the others, to see if it is behaving similarly or if it brings diversification to the portfolio.
“We try to balance the search for low volatility and high dividend-paying stocks. We do it at the same time.”
‘Active quant’
The portfolio is 68% invested in emerging Asia and the remaining 32% across Hong Kong and Singapore. The top three holdings are China Light and Power (3.8%), China Mobile (3.6% and Chunghwa Telecom (3.6%).
Although the fund is essentially a quantitative fund, Just said that there is an active component as well.
“Some risks cannot be identified through models. For example, if a stock price goes up or down by more than 25% in two days, we are going to get rid of the stock.”
Using a model portfolio, every week the team recalculates the volatility and correlations and measures them against pre-defined limits. They then rebuild a theoretical portfolio for low volatility that is used as a reference.
To avoid high turnover, they don’t change the real portfolio every week. “We compare the two portfolios every two weeks and we are going to adjust, on a single stock basis, as far as we can to have the real portfolio as close as possible to the theoretical portfolio.”
Full rebalancing of the real portfolio is done 1-2 times per year. It is carried out when the volatility gap between the real and the theoretical portfolio exceeds the limit allowed. By comparison, Just said pure quant portfolios usually rebalance every month or quarter.
Just invests in mega caps and “small large caps” and when he sells a stock, 70% of the time it is due to M&A activity.
“These ‘small large’ companies are normally with stable business models and not financially leveraged, which makes them perfect prey for M&A. Every year we may have 3-5 stocks in the portfolio that are victims of M&A”.
Just believes his product is differentiated because it is novel in Asia. Investors in the region are not used to combined strategies such as low volatility and high dividend, which he believes mitigates the risk of a conventional global portfolio.
“One benefit of these strategies is that they outperform when other equity portfolios underperform, and they underperform when other equity portfolios outperform.”
Another firm focused on smart beta and Asia is Premia Partners, which intends to launch up to six products in 2018.
