Striking a Balance Between Risk and Reward

Low-volatility funds have been all the rage in the past year after the VIX, or so-called "fear index", spiked to 41 last August and up to 29 in February before settling back to the mid-teens. Adrian Banner, CEO of Janus subsidiary Intech, said his math-based funds are trying to balance both risk and reward when volatility strikes.

"We are not just trying to minimize volatility like a number of the other funds are trying to do," says Banner. "We are also seeking excess returns above the market and managing through many different types of volatile environments that the market can throw at you."

Furthermore, Banner says his firm's computer models look at more than just the VIX, now at 17, to generate alpha, or returns above the market. He says they factor in volatility over different time scales and on an individual stock basis, as well as the correlations between stocks.

"I don't always think the VIX is an accurate indication of what is going to happen," says Banner. "This is measuring some sort of fear and uncertainty, there is uncertainty in volatility and we believe in looking at a lot of different measures of volatility, not just the VIX."

He says Intech has also been in the business of managing volatility for 25 years, as opposed to a number of so-called managed volatility funds that have been recently popping up. As of March 31, 2016, Intech had approximately $48.7 billion under management and 85 employees worldwide.

In terms of returns, Banner said Intech engineered its managed volatility portfolios to try to produce returns of about 2% to 3% over the market over the long term. He says the high turnover in some of his funds comes from systematic rebalancing at the margins -- not concentrated trading -- and the tax implications are less than one might expect.

For example, the Intech U.S. Managed Volatility Fund is up 2.8% thus far in 2016, according to Morningstar, and has a turnover of 107%. The $382 million fund has returned an average of 11% annually over the past five years, outpacing 93% of its Morningstar category peers.

As to whether much of the market's choppiness in the past year is attributable to the Federal Reserve's messaging over its plans for future interest rate hikes, Banner says his programs are reading into what the stocks are saying, not the latest Fed minutes.

"We believe in measuring what is actually inherent in the stock prices," said Banner. "We think the stock prices and the individual stock volatilities and the correlations between the stocks can give you a lot of useful information that a portfolio can then use to be in the right place at the right time."