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Getting the most out of low-vol investing

27-08-2012 | Insight | Pim van Vliet, PhD Do you know why it makes sense to invest in an enhanced low-volatility strategy rather than a generic alternative? That is just one question answered by Pim van Vliet, Senior Portfolio Manager of Robeco Conservative Equities, in a new FAQ on low-volatility investing. (Click here to access the full document, “Frequently asked questions about low-volatility investing 2012”.)

So why does opting for an enhanced low-volatility strategy make sense? As Van Vliet explains, it is because an enhanced strategy, such as Robeco Conservative Equity, can overcome some serious pitfalls associated with low-volatility investing.
“Generic low-volatility strategies, which may be based on a single backward-looking statistical risk measure, such as volatility or beta, are exposed to unnecessary downside risk, high turnover in illiquid stocks and concentration risks,” he explains.

 

Generic low-volatility strategies are exposed to unnecessary downside risk, high turnover in illiquid stocks and concentration risks

 


By contrast, the Robeco Conservative Equity strategy captures the low-volatility premium more efficiently by reducing risk and enhancing return. Risk is reduced by using a combination of statistical risk variables and by including forward-looking risk measures based on a proprietary distress-risk model. Meanwhile, returns are enhanced by selecting low-volatility stocks which also have attractive valuation and sentiment characteristics.

“Not every low-volatility stock is created equal: some are destined to perform better than others,” observes Van Vliet. “We improve risk-adjusted returns by selecting low-volatile stocks that also have attractive return potential.” Chart 1 shows the difference between Robeco Conservative Equity and a generic low-volatility strategy.

Chart 1: Risk & return characteristics of Conservative Equity vs generic low-volatility strategy

chart1.png [Getting the most out of low-vol investing]
Source: Robeco

Other questions that Van Vliet answers in the FAQ include “Will the low-risk effect persist in the future?”; “Is the low-risk anomaly present in all regions?”; and “Are returns from low volatility a result of the small-cap or value effects?” And for those wanting a truly in-depth understanding of low-volatility investing, the FAQ also provides details of Van Vliet’s academic papers in this area.
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