With the global equity market likely to continue to exhibit volatility in the next few years, investors should consider investing in indices that trace the returns of low volatility stocks and bonds rather than the traditional market indices that emphasize market capitalization, fund manager State Street Global Advisors (SSgA) said.

SSgA is considering launching various minimum volatility stock and bond indices in the Asian market over the next few years, and may introduce exchange-traded funds (ETFs) or actively-managed stock or bond funds that trace the market performance of low volatility stock and bond indices in the coming six months.

Global stock markets in 2011 have been extremely volatile due to the growing market uncertainties unleashed by the downgrade of US debt, the continuing European sovereign debt crisis and the weak economic data that confirms faltering economic recovery in the US.

Data from SSgA shows that the MSCI World Minimum Volatility Index has outperformed the MSCI World Index by 11.43 percentage points from early 2011 to the present moment.

"Investors should consider investing in a portfolio of low volatility stocks and bonds as they offer more downside protection in times of volatility so that in the long-term investment can outperform high volatility assets," said Ken Wong, SSgA senior product engineer (equities).

Regarding stock indices construction, Wong said that the minimum volatility approach will be constructed based on a number of company's financial performance ratios such as cash flow, book value, net profit level, sales volume and dividend payouts rather than on market capitalization level alone.

For bond indices construction, Wong said that the minimum volatility approach will put emphasis on the company's profitability, operational efficiency, and leverage and liquidity ratios rather than purely on the number of bond issuances by the company.

Wong predicted that market appetite for the low volatility investment portfolios will be great in times of huge market uncertainty. He added that SSgA has already introduced the S&P index that traces the dividend payouts of companies in the US and has received favorable market responses.

oswald@chinadailyhk.com

China Daily

(HK Edition 09/08/2011 page2)