switzerlanden
Case closed: high volatile stocks have lower returns

Case closed: high volatile stocks have lower returns

16-05-2012 | Insight

Over his long career, Professor Robert Haugen has been an advocate of quantitative investing in general and low-volatility investing in particular. He has been an outspoken critic of the assumed positive relationship between risk and return and was among the first to critically test the Capital Asset Pricing Model almost 40 years ago and to find it wanting.

Haugen and his co-author, A. James Heins documented the lack of a positive relationship between risk and return in the empirical cross-section of stock market returns for the first time in 1972. Over the past four decades, he has continued to contribute consistent evidence of a negative relationship between risk and return, including studies across different time periods, regions and asset classes.

His latest research, written with Nardin Baker, looks at stock prices around the world over more than 20 years. Their conclusion? “We looked at the payoff to risk over 21 years in 17 countries and found it was negative in all individual countries,” said Professor Haugen. “High risk stocks only outperform low-risk stocks for very brief periods of time on a rolling three-year basis.” One such brief period was during the IT bubble, he said, before quickly noting “but high-volatility hardly ever outperforms.”

The data is stunning. “Across all countries, the difference in return between the highest-risk and lowest-risk decile portfolios is 19.4%. If you ranked these stocks based on the return slope, you would see how the higher the risk, the lower the returns. And the difference in return volatility (17.9%) shows that stocks with high volatility in the past will continue to have high volatility in the future.”

Haugen believes the evidence is overwhelming in support of low-volatility investing. “This is all you need,” he said, “case closed.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Be a pioneer: go west!

With empirical evidence persuasively documenting the presence of the volatility effect, Haugen’s advice to investors is to “go west” in the mean-variance space to pursue the returns available from low-risk stocks. He compared the opportunity in low-volatility investing today to the US pioneers of the 1800s, who headed west to the cheap land and open spaces of California. “The price of land went up and up, and this is what will happen to you…Get there fast. Be a pioneer.”

But how long will the anomaly last? Haugen believes it existed “long before” 1926, which is the earliest it can be documented based on the availability of historical stock market data. And he believes it will continue to persist because of the agency effect and human nature.

“Human beings were the same in 1926 as they are now,” he said. “They are still trying to impress each other and their clients. They are still sending their clients into high-volatile stocks.”

He found that institutional investors hold a large portion of high volatile stocks. These are stocks that receive intense analyst coverage and are often in the news. This tendency, he says creates demand, forcing up the prices of high-volatile stocks now and in the future.

While he does not believe there is an end in sight to the volatility effect, he believes it would be a good thing if it did end. “I’m not in this for the money,” said Haugen. “I want the market to correct its mistake.”

“Think of the damage that has been done by modern finance and the trillions of dollars moved into index funds that are dominated by growth stocks. All of those people could have had a much better retirement.”

“I am sitting here as an old goat, because it took you so long to realize I was right after all.”

View Professor Robert Haugen’s address to the Robeco 2012 Low-Volatility Investing seminar.

Subjects related to this article are:
Logo

Disclaimer Robeco Switzerland Ltd.

The information contained on these pages is for marketing purposes and solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients. 

The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Affolternstrasse 56, 8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website www.robeco.ch. Some funds about which information is shown on these pages may fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA). 

Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the RobecoSwitzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile. 

Neither information nor any opinion expressed on this website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco Switzerland Ltd. product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports. 

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

I Disagree