Why Volatility Matters.

For the long focused investor, two consistent behaviors, in combination with keeping fees low, can make a very big difference to returns over time. First, take your losses (and let winners run). Second, minimize drawdowns. Taking losses is pretty straight forward and much easier said than done but it isn’t rocket science. That special little idea didn’t pan out? Move on. But on the second point – minimizing drawdowns – how does an investor evaluate a security’s drawdown? Volatility.

While volatility isn’t perfect, it’s a pretty good indicator and a measurable feature of every investment. If you use beta or standard deviation, both can provide excellent insight into how much a security will go down relative to other investments. And since almost everything goes up and down, being in assets that go down less, increases the odds of making more money over time.

In the Emerging Market and LatAm listed product space, volatility is the name of the game. The broad MSCI Emerging Markets Index, for example, has realized volatility this year of about 22%. To put that into perspective, the S&P500 sports around 14% volatility, so you are taking on a lot of risk for that appreciation potential. But 22% is nothing when you consider that many EM strategies have volatility north of 40%. And for LatAm, volatility shows up in the maximum daily drawdown.


For the year to date period as of 10/19/16, the S&P500 had a max drawdown of 3.8%. Brazil and Mexico saw daily drawdowns of around 6% or more than 50% more. In fact, only two unhedged strategies exhibited lower volatility versus the S&P500 – Chile and Peru. We like both of these countries but we are also cognizant of the fact that they are small economies with very captive investor bases and are not cheap. Latin America Real Estate (LAREPR), on the other hand, had about the same max drawdown as the S&P500 but returned about 3000bps more of appreciation. Even the broad LatAm strategy had a max drawdown of nearly 5%.

Notably, the LatAm Real Estate Total Return Index (LARETR) actually had a max drawdown lower than the S&P500 total return and nearly matched the total return of the broad S&P Latin America Index.