Seasoned investors know full well that periodic, significant declines are a natural part of both economic and equity market cycles. This is the price paid for equities’ attractive capital appreciation, and their place as a cornerstone asset class for long-term investors would seem to indicate most consider it a fair bargain. Asset allocators understand this risk and model their allocations accordingly.
But while capital market assumptions update regularly, the frequency, magnitude, and duration of equity market drawdowns are often embedded in the model. The past few years have seen several sharp drawdowns in rapid succession, prompting many institutional investors to contemplate a “regime change.” We definitely sympathize with this sentiment, but how different are drawdown risks? And if we’re in a new regime, what do we do about it?
Are Drawdowns More Frequent?
Using the S&P 500 as a proxy for equities here due to its long history, since the turn of the century we’ve seen both the two most severe drawdowns since 1950 (the tech bubble of 2000 and global financial crisis of 2008), and three of greater than 20% in the last five years alone (see Figure 1). The catalysts of the latter – trade war concerns, Covid-19, and Russia’s invasion of Ukraine; an inflation hangover from three years of unprecedented stimulus; and subsequent monetary tightening and economic malaise – all might be considered exogenous shocks that investors largely did not see coming. Throw in another decline of more than 10% during the 2015-2016 sell-off and that’s four impactful drawdowns in less than two U.S. Presidential cycles. Compare that with 15 in the preceding 65 years, and they’ve been happening at more than double the rate (5 vs. 2.3 per decade).
Are Drawdowns More Dramatic?
Like the new teenagers in my household, drawdowns have brought a lot of drama with them recently. Since 2015, the duration of the drawdown cycles – from peak to trough and back – has been relatively short (see Figure 2).
While you might assume that large market declines tend to reach their nadir more quickly when that trough isn’t as severe, you might actually be surprised. The recent drawdowns gave us steep declines, and their rebounds were steep too, hence their short durations. Figure 3 shows the relationship between the maximum drawdown and how long the market took to get there.
On average, since 2015 these drawdowns of more than 10% have taken about 5.2 days per percentage point of max drawdown, whereas those in the previous period (1950-2014) took roughly 9 days (Figure 4). The recoveries are bouncing back faster too: 4.3 days per percentage point vs. 14 days in the earlier period (not including the present yet-to-be-recovered decline that began 2022). Of course, we also saw sharp moves in the 1990s but these may be better characterized as very brief corrections in an otherwise predominant bull market.
As we mentioned earlier, the first-order causes of this recent set since 2015 have been primarily external factors, rather than structural issues within financial assets, e.g., the dot-com bubble bursting coinciding with a slowing economy, and the 2008 global financial crisis. Both declines in the early part of this century took much longer to play out as various dominos continued to fall, and commensurately markets took several years to return to their previous highs.
A more prolonged trundle downward allows more time for investors to adapt to a change in regimes and protect their capital. Even active defensive equity strategies may find it challenging to optimize fast enough to handle these rapid shifts in the market environment. Or they may become more defensively positioned near the bottom, only to be caught on the wrong side of the market just as the market rebounds to benefit higher-beta stocks (as it did out of the Covid crisis in 2020).
While the other more recent declines in 2018 and 2020 were substantial but short-lived – the latter almost shockingly so in the face of the worst pandemic in a century – historically, drawdowns that imperil investor outcomes come in all shapes and sizes. The expiration date for today’s equity market uncertainty is yet-to-be-determined, ranging from a deep, recession to the kind of soft landing that would make Captain “Sully” Sullenberger proud.
For all their critical utility to investors, public equities in the short- to medium-term may be at the mercy of geopolitical uncertainty, refreshed concerns about the fragility of our banking system, and a Fed that seems determined to crush inflation with elevated interest rates at nearly any cost. Or it may be some other, yet unknown risk, like many before.
Today’s Equity Strategies Need Convexity and More
Significant equity drawdowns like those we’ve outlined here, whether they’re short-lived or long-lasting, contribute a significant source of risk to most portfolios and the potential for a devastating loss of capital. The typical investor response is to 1) change capital market assumptions, 2) make tactical portfolio changes, or 3) make strategic portfolio changes. These responses come with their own baggage, of course. What’s more, they may do little to navigate drawdowns, as asset class correlations often break down when they’re needed most.
Making asset allocation adjustments for any reason is a complex, time-consuming process, requiring collaboration and communication across investment teams, consultants, and trustees. Making frequent allocation adjustments in the face of drawdowns is simply impractical. Yet, most investors require significant equity allocations, and traditional equity strategies are ill-suited for markets that swiftly change opposite of your expectations.
In response to today’s challenges, Intech has developed an innovative equity strategy that seeks to anticipate market dislocations to provide convexity in market tail events, alpha across market regimes, and help stabilize the portfolio diversification investors intend.
This strategy is engineered to target:
- Convexity in a market tail event
- Reduced systemic risk exposure
- Expected portfolio-level diversification
- Higher risk-adjusted returns
We are excited to share this solution. Designed for today’s evolving equity markets and beyond, the strategy seeks to consistently outperform the capitalization-weighted equity market with less volatility while boosting performance during extreme short-term market moves.
If you’re interested in hearing about it, please don’t hesitate to reach out for more information.
For U.S. Investors:
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance is no guarantee of future results. Investing involves risk, including fluctuation in value, the possible loss of principal, and total loss of investment. Information containing any historical information, data, or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. The characteristics of the Intech strategy described at the end of this presentation are sought during the portfolio management process. Actual experience may not reflect all these characteristics or may be outside of stated ranges and/or objectives. The Intech strategy described is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional and professional investors, Qualified Purchasers, Qualified Institutional Buyers (QIB), Qualified Eligible Persons (QEP), Accredited Investors, and pension consultants (or for such other use as may be authorized by Intech) who have the resources and financial expertise to understand the risks and limitations of the Intech strategy.
There is no performance guarantee associated with investing in any Intech strategy. There can be no assurance that the objectives associated with any Intech strategy will be met or that any investor will or is likely to achieve the investment results described herein. An investment should only be made by those persons who could sustain a loss on their investment.
Any portfolio risk management process discussed that includes an effort to monitor and manage risk, should not be confused with, and does not imply low risk or the ability to control risk. No investment process can eliminate the possibility of negative random events driving performance for short periods. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
S&P 500 Dow Jones Indices LLC and/or its affiliates make no express or implied warranties or representations and shall have no liability whatsoever with respect to any S&P data contained herein. The S&P data has been licensed for use by Intech and may not be further redistributed or used as a basis for other indices or any securities or financial products. This presentation has not been approved, reviewed, or produced by S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices, please visit www.spdji.com.
This presentation or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
For Europe Investors – Important Information:
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. The characteristics of the Intech strategy described at the end of this presentation are sought during the portfolio management process. Actual experience may not reflect all these characteristics or may be outside of stated ranges and/or objectives. The Intech strategy described is speculative, involves substantial risk, and is not suitable for all investors.
This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution.
There is no performance guarantee associated with investing in any Intech strategy. There can be no assurance that the objectives associated with any Intech strategy will be met or that any investor will or is likely to achieve the investment results described herein. An investment should only be made by those persons who could sustain a loss on their investment.
Any portfolio risk management process discussed that includes an effort to monitor and manage risk, should not be confused with, and does not imply low risk or the ability to control risk. No investment process can eliminate the possibility of negative random events driving performance for short periods. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
Past performance does not predict future returns. Marketing communication. The value of an investment and the income from it can fall as well as rise and investors may not get back the amount originally invested. There is no assurance the stated objective(s) will be met. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell, purchase or hold any investment.
There is no assurance that the investment process will consistently lead to successful investing. Any risk management process discussed includes an effort to monitor and manage risk which should not be confused with and does not imply low risk or the ability to control certain risk factors.
Various account minimums or other eligibility qualifications apply depending on the investment strategy, vehicle or investor jurisdiction. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
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For Australian Investors:
This information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information you represent that you are a wholesale client.
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance is no guarantee of future results. Investing involves risk, including fluctuation in value, the possible loss of principal, and total loss of investment. Information containing any historical information, data, or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. The characteristics of the Intech strategy described at the end of this presentation are sought during the portfolio management process. Actual experience may not reflect all these characteristics or may be outside of stated ranges and/or objectives. The Intech strategy described is speculative, involves substantial risk, and is not suitable for all investors. This document is intended solely for the use of wholesale clients, and is not for general public distribution.
There is no performance guarantee associated with investing in any Intech strategy. There can be no assurance that the objectives associated with any Intech strategy will be met or that any investor will or is likely to achieve the investment results described herein. An investment should only be made by those persons who could sustain a loss on their investment.
Any portfolio risk management process discussed that includes an effort to monitor and manage risk, should not be confused with, and does not imply low risk or the ability to control risk. No investment process can eliminate the possibility of negative random events driving performance for short periods. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
S&P 500 Dow Jones Indices LLC and/or its affiliates make no express or implied warranties or representations and shall have no liability whatsoever with respect to any S&P data contained herein. The S&P data has been licensed for use by Intech and may not be further redistributed or used as a basis for other indices or any securities or financial products. This presentation has not been approved, reviewed, or produced by S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices, please visit www.spdji.com.
This presentation or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
