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MSCImsci.com

Focus: Volatility

VALUE

SIZE

MOMENTUMQUALITYYIELDVOLATILITYGROWTHLIQUIDITY

Factor focus: Volatility 1Factor focus:Volatility
In the realm of investing, a factor is any characteristic that helps explain the long-term risk andreturn performance of an asset. MSCI Factor Indexes are designed to capture the return of factors
which have historically demonstrated excess market returns over the long run.
MSCI Factor Indexes are rulesbased, transparent indexes
targeting stocks with favorable
factor characteristics – asbacked by robust academic
findings and empirical results– and are designed for simple
implementation, replicability,
and use for both traditional
indexed and active mandates.

Defining Volatility
A minimum volatility strategy
involves buying stocks based on
the estimate of their volatility andcorrelations with other stocks.
Minimum volatility iscategorized as a “defensive”
factor, meaning it has tended
to benefit during periodsof economic contraction(see “Performance andImplementation”). This type2 Factor focus: Volatilityof strategy is more concernedwith volatility management
than with maximizing gains.
Paradoxically, the strategy
has produced a premium overthe market for long periods,
contravening the principlethat investors should not berewarded with higher riskadjusted returns for taking lessthan market risk.
The key objective of a minimum
volatility strategy is to capture
regional and global exposure tostocks with potentially less risk.
Historically, the MSCI Minimum
Volatility Indexes, for example,
have realized lower volatility
and lower drawdowns (peakto-trough declines) relative
to their parent index duringsignificant market downturns.

Why investors haveused minimum
volatility strategies
Tactical investors have used
MSCI Minimum Volatility
Indexes to reduce risk duringmarket downturns, while
retaining exposure to equity.
Strategic investors haverecognized (1) the benefits ofminimum volatility strategies
in asset allocation and (2) thatminimum volatility strategies
have tended to outperform highvolatility strategies on a riskadjusted basis in the long run.
There are several behavioral
explanations for the minimum
volatility premium, which wasidentified in the early 1970s by
economist Fischer Black andelaborated on by others sincethen. One theory posits thatinvestors underpay for low
volatility stocks, viewing themas less rewarding, and overpay
for high volatility stocks that areseen as long-shot opportunities
for higher returns. A secondary
academic explanation holds thatinvestors can be overconfident
in their ability to forecast thefuture, and that their opinions
differ more for high volatility
stocks, which have less certain
outcomes, leading to higher
volatility and lower returns.
In terms of methodology,
the main approaches toimplementing a minimum
volatility strategy fall into twogroups: (1) simple rank andselection and (2) optimizationbased solutions.

A simple approach ranks theuniverse of stocks by their
expected volatility, selects a
subset of the constituentsfrom the universe and thenapplies a weighting method.
These approaches generally
ignore the correlation between
stock returns, which can have asignificant impact on the overall
volatility strategy.
While a simple rank andselection method reflects thevolatility of individual stocks,
optimization-based approaches
account for both volatility andcorrelation effects, i.e., themagnitude and the degree towhich stocks move in tandem.
However, a naive unconstrained
minimum volatility strategy
has its own set of challenges,

such as biases towardcertain sectors and countries,
unwanted factor exposuresand potentially high turnoverat rebalancing. Well-designed
optimizations with carefully
constructed constraints,
however, may be able toneutralize these shortcomings.
The MSCI Minimum Volatility
Indexes are calculated
by using an optimization
designed to produce anindex with the least overall
volatility with a given set ofsector, country, and factor
constraints in addition toensuring index replicability
and investability.

Tactical investors have used
MSCI Minimum Volatility
Indexes to reduce risk duringmarket downturns, while
retaining exposure to equity.

Factor focus: Volatility 3

Performance &implementation
Long-term performance: December 1999 - December 2023

MSCI World Factor Indexes
Over time, individual factors have delivered outperformance relative to the market.

Long-term performance

Although factor strategies have exhibited long-term outperformance, in the short-term, factor
performance has been cyclical and has generated periods of underperformance.

WorldWorld Enhanced Value

World Quality

World Equal Weighed

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield

The MSCI World Minimum Volatility (USD) Index has historically generated excess returns over the longrun with a 1.0% annual return over the MSCI World Index since 1999 as represented above.

4 Factor focus: Volatility

Factor focus: Volatility 5How factors have performed
relative to each other:Volatility

Conclusion
Minimum volatility is one of the few factors that have performed wellin turbulent markets, serving as a means of capital preservation.
Moreover, over long periods of time, this defensive strategy has
produced a premium over the market, contravening one of the mostbasic theories in finance — that one should not be rewarded withgreater returns for taking less than market risk.
While naïve minimum volatility indexes may have unintended
exposures to other factors, optimization based minimum volatility
strategies have been calibrated to achieve targeted levels of country,
sector and style exposure without significantly increasing volatility
risk itself. The MSCI USA Minimum Volatility Indexes aim to reflect
the performance characteristics of a minimum volatility strategy
by optimizing towards the lowest absolute risk within a given set of
constraints to minimize unintended risks and exposures.

WorldWorld Enhanced Value

World Quality

World Equal Weighed

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual, back tested or simulated — is noindication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind ofinvestment decision or asset allocation and should not be relied on as such. The time periods covered in the charts in this paper were dictated by the data available when we conducted the simulations
which produced them. There are frequently material differences between backtested or simulated performance results and actual results subsequently achieved by any investment strategy.

6 Factor focus: Volatility

Factor focus: Volatility 7

Learn more about Factor Investing at
www.msci.com/factor-investing

About MSCI Inc.
MSCI is a leading provider of critical decision support toolsand services for the global investment community. With
over 50 years of expertise in research, data and technology,
we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and returnand confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.

The information contained herein (the “Information”) may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI ESG Research. The Information may not be
used to verify or correct other data, to create any derivative works, to create indexes, risk models, or analytics, or in connection with issuing, offering, sponsoring, managing or marketing any securities,
portfolios, financial products or other investment vehicles. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.
MSCI ESG Research is provided by MSCI Inc.’s subsidiary, MSCI ESG Research LLC, a Registered Investment Adviser under the Investment Advisers Act of 1940. MSCI ESG Research materials, including
materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body.
None of the Information or MSCI index or other product or service constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy.
Further, none of the Information is intended to constitute a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. MSCI ESG and climate
ratings, research and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG Indexes, Analytics and Real Estate are products of MSCI Inc. that utilize information from MSCIESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK) and MSCI Deutschland GmbH . The Information is provided “as is” and the user of the Information assumes the entire risk of any
use it may make or permit to be made of the Information. NONE OF MSCI INC. OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR DIRECT OR INDIRECT SUPPLIERS OR ANY THIRD PARTY INVOLVED INTHE MAKING OR COMPILING OF THE INFORMATION (EACH, AN “INFORMATION PROVIDER”) MAKES ANY WARRANTIES OR REPRESENTATIONS AND, TO THE MAXIMUM EXTENT PERMITTED BY LAW,EACH INFORMATION PROVIDER HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUTLIMITING ANY OF THE FOREGOING AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL ANY OF THE INFORMATION PROVIDERS HAVE ANY LIABILITY REGARDING ANY OF THE
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