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Marketscape Takeover | 05.06.25

Managing Equity Risk for a New Type of Volatility

Deputy CIO and CIO of Global Equities Mike Hunstad, Ph.D., examines the underlying forces behind more severe volatility spikes and approaches to managing equity allocations in this environment, in an interview with Northern Trust Asset Management President Daniel Gamba, CFA.

KEY POINTS

What it is

We examine how some market trends are making severe volatility spikes more common and the equity strategies that may mitigate this risk.

Why it matters

Investors often seek to mitigate equity risk during market turbulence without losing significant long-term equity performance.

Where it's going

High quality and low volatility equity strategies combined performed well during recent market turbulence, and can provide long-term equity exposure with less volatility.

Daniel Gamba (DG): During periods of high market volatility, clients want to participate both on protecting their portfolios, but they also want to be part of the upside. Clearly, in markets that we are experiencing today show exactly that. The losses followed by massive returns. So those are tricky markets to navigate. So Mike, we're here today with you. How do you compare these periods of market volatility relative to prior periods?

Mike Hunstad (MH): I mean clearly the tariff issue is having a macro implication for volatility, higher volatility as a result of that. But that's not the end of the story. There's a lot more to it under the hood. There's a micro side as well. And one of the really interesting facets of today's market is that retail participation in the market is making the markets, call it more jumpy. It moves on a relatively smaller dollar amount of flow. The price moves even more extreme than it has in the past. So that, we have more retail ETFs, we have more emotion that's involved in markets today than there was 10 or 20 years ago. And as a result of that, you get a higher frequency and severity of these volatility shocks like we've seen over the last several months.

DG: Different market conditions this time. Clearly participation from retail investors as well as new participants like exchange traded funds be a big part of the market. So considering these fluctuating market conditions, how do you play these markets, Mike?

MH: One way to approach this market is to think about a higher quality, lower volatility orientation to your to your equity allocation. So when you think about what happens in a volatility event, a volatility shock, typically markets are in a big drawdown. But higher quality lower volatility stocks tend to mitigate some of that downside. So what happens is the market tends to draw down, the flight to quality higher quality lower volatility, tend to have a better performance historically. When markets rebound, which is faster and faster these days, those same high quality, low volatility stocks that help to mitigate some of that downside risk participate a lot in the upside. So having that higher upside capture, lower downside capture can materially add to the performance of your strategy.

DG: That’s excellent. And within our portfolios in the high quality low volatility portfolios, how have we done?

MH: So quarter one of this year, these strategies have outperformed by about 500 basis points. Now that's a short term number. Longer term these strategies have actually kept up with the market. They've achieved about 99% of the return of a core benchmark. So, it's about, again, risk mitigation. That's the objective of the strategy. But participating, on the upside as well, having that lower downside capture, higher upside capture allows you to mitigate a lot of that risk. But, participate in the upside of the market as well.

DG: Thank you, Mike, thank you for your insights about the high quality, low volatility strategies.

 

Meet Your Expert

Michael Hunstad, Ph.D.

Deputy Chief Investment Officer & Chief Investment Officer of Global Equities

 

Michael Hunstad is Deputy Chief Investment Officer and Chief Investment Officer of Global Equities for Northern Trust Asset Management. Michael is a member of the Asset Management Executive Group and has oversight of all equity portfolio management, research and trading activities including quantitative, index and tax-advantaged strategies. Additionally, he assists with the development of investment vision, strategy portfolio construction and risk management framework for the firm’s broad investment platform.

Michael Hunstad image

IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

 

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

 

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This information may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

 

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

 

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

 

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