Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.
Phillip Brzenk is Head of Multi-Asset Indices at S&P Dow Jones Indices (S&P DJI). His team is responsible for the product management of multi-asset and option indices, which cover a variety of outcome-oriented index solutions including managed volatility, retirement, dynamic allocation, inflation hedging, sustainability, and absolute return.
S&P DJI: Following the 2008 Global Financial Crisis (GFC), many investors with longer-term time horizons and liabilities found themselves more averse to volatility. How did this give rise to the S&P Risk Control Indices?
Phil: The GFC brought significant disruption to the markets, with U.S. equities (as measured by the total return of the S&P 500®) dropping over 55% from Oct. 9, 2007, to March 9, 2009. In addition, correlations between asset classes increased, reducing potential diversification benefits normally associated with standard allocation strategies. Coming out of the crisis, there was a clear need to develop a systematic asset allocation framework that could react quickly to changing market conditions, with a particular focus on controlling volatility—and with that, S&P DJI was a pioneer in the market when we launched the first S&P Risk Control Indices in 2009.
S&P DJI: Some practitioners might ask, why manage risk when it can be avoided?
Phil: The S&P Risk Control Indices attempt to give asset class exposure to equities and cash (Risk Control 1 [RC]) or equities and Treasury bonds (Risk Control 2 [RC2]) for potential long-term return premium over short-term cash. The index series incorporates a reactionary asset allocation framework that shifts between the asset classes in order to target a specific volatility target percentage. While volatility is not precisely equivalent to risk, having a volatility target enables participants to match their appetite for risk taking. The asset allocation framework and volatility target in S&P DJI’s risk control indices have historically enabled them to achieve reduced tail risk and higher risk-adjusted returns compared to standard equity exposure.