Parametric’s Defensive Equity (DE) strategy addresses the needs of superannuation funds to reduce the downside risk and volatility of an equity portfolio while also generating capital growth and income for members, particularly as they move towards and through retirement. The strategy seeks to achieve attractive risk-adjusted returns relative to the S&P/ASX 200 or MSCI ACWISM across all market environments. DE follows a different path to low volatility equity investing - one that structurally reduces equity market risk, while adding a distinct, persistent and relatively uncorrelated risk premium to enhance returns. It is expected that over the long term, this tradeoff will lead to a smoother ride along the way and more predictable outcomes. The strategy is available as a separate account to enable per-client customisation.
We construct and manage our DE portfolios to capitalise on the financial "volatility risk premium" that has historically been embedded in option prices. Defensive Equity creates implicit downside protection through a core asset allocation split between equity and bills or bonds. We sell equity index call and put options against these core positions. All short option positions are fully-collateralised in order to eliminate any potential leverage. Superannuation funds and other investors can utilise DE within their asset allocations in several ways including: as the core equities component of a post-retirement solution, to complement higher risk equity strategies, as a replacement for traditional hedged equity strategies, to provide an additional component within the liquid alternatives bucket, and as a potential alpha source that can be transported to other assets when managed on an “options only overlay” basis.