Even though confidence among Australian consumers remains relatively stable, this seems to be despite the current political climate, rather than because of it. Consumer confidence overall remains steady, according to the latest ANZ-Roy Morgan Consumer Confidence Index, which rose 1 basis point to 113.4 in the week to October 29.

Consumers don't see their personal finances being hit directly, despite rising pessimism about the economic outlook, possibly as a result of increasing political uncertainty, ANZ head of Australian economics, David Plank, told AAP this week.

Morningstar's head of equity research, Peter Warnes, believes there is a "gnawing gap between survey results and reality," referring to the latest National Australia Bank business confidence survey and the Westpac-Melbourne Institute Index of Consumer Sentiment.

From an international perspective, he also wonders how much longer the record-breaking run of US markets will continue. "Equities markets have embraced the possibility of corporate tax cuts, but just how much is already discounted in market prices is key, and I suspect, plenty," Warnes says.

Managing domestic volatility

Given the uncertainty, managed funds such as the AB Managed Volatility Equities [40678] may be worth considering. Regarded by Morningstar as a five-star, bronze medal fund, it "takes a differentiated approach to quantitative investing in Australian equities for a competitive price," says Anshula Venkataraman, Morningstar manager research analyst.

Morningstar's Star Rating is a grading of longer-term past performance, which can serve as a worthwhile starting point for investor research, combined with others such as the Morningstar Analyst Rating, a forward-looking research tool.

The above fund's strategy aims to deliver returns ahead of the S&P/ASX 300 Franking Credit Adjusted Index, with 25 per cent less volatility on average. Typically weighted towards Australian equities (80 per cent), with 20 per cent in global stocks, its global exposure sits primarily in sectors under-represented in Australia, such as healthcare and technology.

Under the leadership of AllianceBernstein (AB) chief investment officer, Roy Maslen, "the team takes a distinguished and thorough approach" in applying a quantitative screen that selects stocks based on quality, value, and price stability, says Venkataraman.

The metrics deployed in these screens are specifically targeted to provide downside protection. Further to this process, fundamental analysts remove any stocks with perceived risk not captured by these metrics--including event risk, cyclical downturns, and balance sheet stress--a feature Morningstar particularly likes.

The fund strategy aims for 50 per cent protection against the downside, while capturing 80 per cent of the upside--with the latter also driven by a quantitative model that selects stocks displaying price stability, sustainable cash flows and strong business models, and attractive valuations.

This results in the selection of around 65 Australian stocks, with approximately 15 filtered out by fundamental analysis. CSL Limited (ASX: CSL), Telstra (ASX: TLS), Insurance Australia Group (ASX: IAG), Cochlear (ASX: COH) and Transurban Group (ASX: TCL) are currently the top-five holdings.

Mitigating global risk

With a more international focus, the Acadian Global Managed Volatility Equity [19591] fund is also a bronze medallist fund, but with three stars.

"We believe this is a worthwhile option for investors seeking a global equity solution that aims to minimise drawdowns," says Chris Douglas, Morningstar's director of manager research.

Acadian also seeks to build equity portfolios containing mostly low-volatility stocks, which according to Douglas "is no easy feat, but Acadian's depth of experience gives us confidence, having run these types of portfolios since 2006 and in Australia since 2010".

He concedes that the fund's weightings of small-cap and emerging markets stocks are "yet to be truly tested during major stress" with its performance in late 2016 suggesting the approach "may lag during a period of prolonged interest rate rises, although the period is too short to make formal conclusions".

"There are risks to investing in any approach like this, but we think that Acadian Global Managed Volatility will suit investors looking for an investment in equities but with a focus on minimising the losses," Douglas says.

With international stocks accounting for about 96 per cent of the portfolio, the top three countries are the US (44 per cent), Japan (8.4 per cent), and Canada (5.7 per cent), with a split of roughly 90 per cent and 10 per cent between developed and emerging markets.

With annual stock turnover expected to be between 40 and 60 per cent, Facebook, Apple and Amazon rank among the top five index holdings.

As at 30 June 2017, the fund had 468 equity holdings, with companies Mettler-Toledo International, JPMorgan Chase & Co, ManpowerGroup, and Johnson & Johnson among the top 10.

The fund's quantitative approach seeks to exploit the mispricing of risk within global equities. In addition to considering correlations in reducing the risk of potential losses, the team also models liquidity and transactional costs before the portfolio is constructed. 

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Glenn Freeman is a senior editor at Morningstar.

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