Wealth Management unveils innovative instrument aimed at assisting clients in mitigating the risks associated with owning individual stocks.
In the dynamic world of investment, maintaining a balanced portfolio is crucial to weathering market volatility. To help investors navigate this challenge, Wealth Management's Global Investment Office (GIO) has launched a new proprietary tool called the Equity Vulnerability Score.
This innovative tool is designed specifically for clients and Financial Advisors who have concentrated equity positions, defined as five or fewer stocks making up more than 30% of the risk in a portfolio. The Equity Vulnerability Score helps measure and rank the susceptibility of US stocks to potential future drops in value.
The score is based on a broad range of indicators in three main categories: Financial Stability, Fundamental Momentum, and Volatility and Tail Risk. It draws from a wealth of data, primarily from FactSet's Quant Factor Library (QFL) dataset.
Historically, individual stocks contained in the Russell 1000 Index have been more than twice as volatile as the index itself (37% v. 15%) since 2014. Furthermore, the average stock's maximum drawdown was twice as large as the index's (approximately 50% vs. 25%). This means that a decline in the value of a concentrated portfolio would cause the portfolio's overall value to decline to a greater degree than that of a less concentrated portfolio.
Concentrated equity positions can expose investors to underperformance, higher volatility, and material drawdowns. The Equity Vulnerability Score can help flag the likelihood that a stock may soon drop in value and can complement the existing Tactical Equity Framework.
It's worth noting that most stocks that outperformed the index over five years went on to then underperform in the following five years. This underscores the importance of managing concentration risk to ensure long-term portfolio stability.
The Equity Vulnerability Score is a quantitative factor-based ranking of US stocks' relative vulnerability to future drawdowns. It provides an objective, empirical basis for decision-making focused on portfolio diversification and risk reduction.
For those interested in learning more about the Equity Vulnerability Score, we recommend reading the Global Investment Committee Special Report: Confronting the Concentrated Equity Challenge and Measuring Drawdown Vulnerability.
[1] This report serves as the primary source of information for the Equity Vulnerability Score.
- Maintaining a balanced portfolio is crucial in the dynamic world of investment to withstand market volatility.
- Wealth Management's Global Investment Office (GIO) has introduced a new tool, the Equity Vulnerability Score, to help clients and Financial Advisors with concentrated equity positions.
- The Equity Vulnerability Score measures and ranks the susceptibility of US stocks to potential future drops in value, based on indicators in Financial Stability, Fundamental Momentum, and Volatility and Tail Risk.
- Historically, individual stocks within the Russell 1000 Index have been more volatile and experienced larger maximum drawdowns compared to the index itself.
- Concentrated equity positions can expose investors to underperformance, higher volatility, and material drawdowns, making it crucial to manage concentration risk for long-term portfolio stability.
- The Equity Vulnerability Score can help flag the likelihood that a stock may soon drop in value, complementing the existing Tactical Equity Framework.
- For more insights into the Equity Vulnerability Score, readers are advised to refer to the Global Investment Committee Special Report: Confronting the Concentrated Equity Challenge and Measuring Drawdown Vulnerability, which serves as the primary source of information for the score.
