There are two likely explanations for this reversal in turbulent times: Large cap companies outperform because of a flight to safety that drives up their prices, and value outperforms growth because value typically has less volatility. In turbulent markets, investors flock to less volatile assets.

Kritzman also discussed the currency carry trade, which his firm, Windham Capital, employs for its institutional clients.  This trade involves selling the currency of a country that has a low interest rate and purchasing the currency of a country with a high interest rate, usually using leverage, thereby capturing the difference in the two rates.  This strategy is one of the most historically reliable ways of producing alpha.  By cutting back on this strategy when the markets become more turbulent, Kritzman shows that the alpha of the strategy can be increased. 

Implications for Advisors

Windham originally developed these tools for its institutional clients, and it recently expanded its offering to financial advisors.  They offer a couple of software packages, including the Windham Financial Planner, that include a full suite of traditional financial planning tools, along with market forecasting, risk estimation, and portfolio optimization.  Within this software is the requisite data for all asset classes, updated daily from Windham’s database.  Users can monitor market turbulence on a daily or monthly basis, and the system will recommend portfolio changes at the outset of a period of turbulence.

There are between 50 and 75 advisory firms currently using Windham’s tools in the US.  Lucas Turton, Vice President of Marketing at Windham, explained that Windham’s software tools “appeal to those advisors that want portfolio construction and risk management. Those who outsource portfolio construction tend to be less interested.”

The volume of inquiries for their tools has spiked along with the markets’ volatility in October, Turton said.

Many advisors use Windham’s tools to communicate strategies to clients.  “Advisors want to explain to clients how much money can be lost with certain strategies, along with the consequences of certain asset allocations when turbulence occurs,” Turton said.

Windham’s tools do not predict when turbulence will occur and they should not be confused with market-timing strategies. They would not have recommended, for example, going to cash in earlier this year.  But they will recommend portfolios that perform better, based on historical data, during turbulent periods.

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