Low Beta Doesn't Necessarily Mean Low Risk for These Funds

Gretchen Rupp: Two funds in the Morningstar option-writing category highlight that just because two strategies are both low beta with respect to the S&P 500, doesn't mean they will necessarily follow a similar performance pattern.

Neutral-rated LJM Preservation & Growth and Bronze-rated Allianz Structured Return are both low-beta strategies. That does not mean that these strategies are necessarily low volatility themselves. For example, LJM's standard deviation during the three years through August 2017 was 9.1, slightly below the S&P's 10.1. Meanwhile, Allianz's fund has provided a steadier ride; its standard deviation was 2.9%. But LJM's additional risk has at least provided fundholders with higher returns; it's gained 8.5% annually over the same three-year period.

Neither strategy is a straightforward covered call or collar option writing-strategy that is prevalent in this category. The Allianz fund does use a covered call approach at the core, but the team also places additional bets that will pay off if the market swings more severely either up or down.

LJM differentiates its fund by not owning an underlying equity index. So their strategy, which includes selling call and put options, has more leverage that's not easily quantifiable by a fundholder.

Each of the funds remain susceptible to short-term losses. For example, the Allianz fund lost 3.6% and LJM lost 6.2% in August 2015 when volatility in the markets spiked, reminding investors that low beta does not equate to low risk.