Winning More by Losing Less

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Even with the right asset allocation, investors may be taking on too much risk in their portfolios. To be sure, investors generally understand that investment success depends on maintaining an asset allocation matched to their financial goals. But how the asset allocation is implemented can be just as important. Designing portfolios with an asymmetric returns pattern should dampen volatility, provide a smoother ride and potentially improve long-term wealth accumulation — in effect, winning more by losing less. 

The importance of managing portfolio volatility has particular relevance as investors confront high asset valuations and global macro risks that can cause sudden market downdrafts. Challenging market conditions argue for a differentiated approach to portfolio construction, one designed to reduce downside volatility. 

Traditional portfolio strategies tend to serve investors well in steadily rising markets, but they can prove less suited to the more volatile markets that appear to have become the norm. For instance, passive index-linked strategies can expose investors to guaranteed after-fee underperformance compared to the underlying index when markets decline. Among active strategies, a single-manager approach can limit diversification, thus exposing investors to the risk of style bias and underperforming the market through poor security selection. And using multiple investment managers may not improve risk-adjusted returns unless their investments are complementary — exhibiting differentiated performance characteristics. 

Designed to improve returns by targeting downside risk

A better approach to portfolio management targets asymmetric outcomes — capturing a smaller share of the market’s losses and a proportionately larger share of its gains. An asymmetric returns strategy is designed to reduce the frequency and size of investment losses that represent a “volatility tax” — an invisible and often overlooked drain on the long-term compounding of returns. The volatility tax is the additional penalty investors suffer when trying to recover from losses. For example, when a $100 investment declines to $50, the investor incurs a 50 percent loss. But getting back to the original $100 requires a gain of 100 percent — double the percentage loss. An asymmetric strategy can potentially enhance long-term performance by reducing the magnitude of losses and compounding improved risk-adjusted returns over time. This has the benefit of creating a smoother ride, making it easier for investors to stay the course through volatile markets. Fundamental to this approach is the construction of actively managed portfolios that are uniquely diversified by asset class, manager, investment process and characteristics, with exposure to both public and private markets.

The art and science of portfolio construction

Historically, portfolio construction has been driven by asset allocation — the proportions assigned to various asset categories. To improve relative performance and reduce portfolio volatility, or absolute risk, investors should not simply invest in passive indexes that track the market’s performance. Instead, they should employ an active approach — taking relative risk by investing in portfolios whose components differ significantly from market indexes. The goal is to create portfolios that generate excess returns commensurate with the level of active risk, or tracking error. These portfolios target high risk-adjusted returns across various measures of risk. Specifically, we place high emphasis on Sharpe and Sortino Ratios. While the Sharpe Ratio penalizes both upside and downside volatility, the Sortino Ratio penalizes only downside volatility, which we seek to minimize.

To achieve these portfolio construction objectives, we select managers who bring added value. They share common traits as astute investors and dynamic decision-makers whose financial incentives are materially aligned with positive outcomes, meaning they invest their personal wealth in the strategy and their compensation is heavily tied to performance. Ultimately, a manager’s returns should be idiosyncratic, a reflection of skill — domain expertise, ability to identify mispriced assets, or an understanding of various dimensions of risk — versus chance.

After identifying complementary managers who add value, Glenmede effectively weaves the strategies together as sub-asset class investment mixes that target higher risk-adjusted returns, compared to any single strategy in isolation. Furthermore, we aggregate the components and analyze the resulting construction to ensure that portfolio characteristics such as style, geography and capitalization align with our views on global capital markets. 

Importantly, a mix of complementary managers minimizes the need for significant portfolio adjustments over time. Instead of having to replace managers and liquidate their positions, for example, Glenmede can adjust strategy weights through relatively small tactical “tilts,” such as growth versus value, resulting in less turnover and, potentially, lower taxes.

Asymmetric returns strategy in practice: international equity investments

As an example, international equity investing can demonstrate the practical benefits of an asymmetric returns strategy. Despite their importance for diversification, international markets have significantly underperformed U.S. markets for the past decade, causing many investors to question or reduce their non-U.S. equity exposure. An asymmetric returns approach can help investors maintain international diversification by reducing the level of volatility, potentially resulting in a smoother ride.

Benefits of reducing downside risk: potential for greater wealth accumulation

Exhibit 1 illustrates the performance of a hypothetical portfolio consisting of six different international equity managers representing distinct styles, compared with a market index and a Morningstar category representing Foreign Large Blend mutual funds. The hypothetical portfolio would have provided higher absolute returns, lower volatility and superior risk-adjusted returns during a 13-year period, September 2006 through December 2019, compared to the index and Morningstar category.1 In addition, the portfolio would have suffered cumulative losses in 11 months, compared with 28 and 43 months, respectively, for the market index and Morningstar category. Earning fewer losses would have contributed to the hypothetical portfolio’s higher cumulative growth rate and lower “volatility tax.” Moreover, the hypothetical portfolio’s asymmetric returns — earning more of the market’s gains than its losses — is demonstrated by the 92.52 percent upside capture ratio and smaller, 79.99 percent downside capture ratio. 

The potential benefits for long-term wealth accumulation are shown in Exhibit 2, representing the hypothetical growth of a $10,000 investment in the international equity portfolio during the 13-year period. This hypothetical asymmetric returns portfolio grew to $26,127, compared with $16,230 and $14,956, respectively, for the index and Morningstar category — representing a more than 60 percent increase in cumulative growth during the period.

Losing less can be a winning approach 

In any market environment, a portfolio construction philosophy built on asymmetry may do a better job of reducing overall risk while also easing concerns that any single manager may underperform. And active management can potentially provide a measure of downside protection that is generally not available from passive strategies.

The unpredictability of macro threats requires consideration of a new approach to managing portfolios, focusing on limiting downside risk.  As any investor should know, losses are inevitable, even in relatively benign markets. With its potential to reduce losses and create a smoother ride, however, an asymmetric returns-based approach can improve outcomes while helping investors stick to their long-term investment strategy through up and down cycles. Ultimately, this is a smarter path to achieving financial success.


  • Conduct quantitative screening of the manager universe.
  • Compare performance characteristics based on excess return, beta, alpha, Sharpe Ratio, Sortino Ratio, Information Ratio, upside and downside market capture, tracking error.
  • Narrow the universe to a manageable number for qualitative due diligence.
  • Engage directly with managers to assess investment philosophy, process and people to make the final selection.


Glenmede customizes portfolios — built along dimensions of complexity, risk level and excess return potential — in response to individual client objectives. In general, these portfolios are designed to achieve the following characteristics:

  • Competitive risk-adjusted returns
  • Performance asymmetry
  • A lower magnitude of loss, relative to the respective benchmark
  • Access to differentiated, capacity-constrained strategies
  • A thoughtful approach to fees and taxes


A hypothetical portfolio using six international equity managers with different styles produced higher absolute and risk-adjusted returns, with a lower “volatility tax” and fewer monthly losses, compared to the benchmarks shown below, for the period September 2006 through December 2019.

Data reflect combined performance net of fees for the following six international equity investment strategies at specified allocations, rebalanced quarterly: WCM Focused Growth International, 32 percent; Hartford Schroders International Multi-Cap Value Fund, 20 percent; Oakmark International Institutional Fund, 17 percent; Matthews Japan Institutional Fund, 14 percent; GQG Partners Emerging Markets Equity, 11 percent; and Matthews Pacific Tiger Institutional Fund, 6 percent. Performance for GQG Partners includes the manager’s track record at a former firm. The time period shown reflects the longest track record common to all six investment strategies

Source: Glenmede, eVestment and Morningstar Direct.


Growth of $10,000: Hypothetical multi-manager international equity portfolio vs. MSCI ACWI ex USA Index and Morningstar Foreign Large Blend mutual fund category (September 2006 – December 2019).*

* The accumulation graphs are shown in two ways. The wavy lines represent monthly returns and the lines with smoothed volatility represent average monthly compounded returns. The ending accumulation amounts are the same for both.

1. We refer to the portfolio as “hypothetical” because it does not represent an actual client portfolio for the specific time period shown in the performance illustration. The hypothetical performance data reflect six strategies that are used in client portfolios. The time period reflects the longest track record common to all six strategies.

1. The average annual return for rolling 12-month periods (rather than calendar years). 
2. A measure of volatility explaining how much returns deviate from the average.
3. A measure of risk-adjusted returns that explains the level of return per unit of risk.
4. A measure of risk-adjusted returns that penalizes only downside volatility (Sharpe Ratio penalizes upside and downside volatility equally.)
5. Cumulative average growth rate, which includes the negative impact of volatility.
6. The difference between average annual returns and the geometric return. It represents the negative impact of losses on an investment’s cumulative growth over time.
7. The size of the volatility tax relative to annual returns.
8. How much of the market’s gains (upside capture) and losses (downside capture) are reflected in investment returns.
9. The MSCI ACWI ex USA Index is a stock market index comprising non-U.S. stocks from 23 developed markets and 26 emerging markets. Indexes are unmanaged and do not charge fees. You cannot invest directly in an index.
10. The Morningstar Foreign Large Blend category for this time period includes 95 active mutual funds seeking capital appreciation by investing in large-cap foreign stocks with market capitalizations greater than $5 billion. The blend style is assigned to funds where neither growth nor value characteristics predominate. These funds typically will have less than 20% of assets invested in U.S. stocks.

Additional Chart Disclosures

Though data was gathered in good faith, Glenmede did not independently assess any of its accuracy. The performance of this hypothetical investment portfolio was achieved with the benefit of hindsight and does not represent actual investments in these strategies at the indicated levels. These hypothetical results do not reflect the impact material economic and market factors might have had on actual decision-making — had actual client funds been involved. All of these factors can adversely affect actual trading results and performance, including the willingness of clients to persist in the face of declining performance. This hypothetical, back-tested performance also does not take into account actual performance, trading costs or the impact of taxes and should not be interpreted as an indication of such performance. The funds and/or managers in the hypothetical portfolio may not be accessible to or appropriate for all investors, and may not have been available to Glenmede clients during the indicated timeframe. Actual client results differed materially. Investing involves risk and past performance may not be indicative of future results.