switzerlanden
What is driving the growth in low-volatility investing?

What is driving the growth in low-volatility investing?

18-10-2012 | Insight

A long and successful track record, portfolios covering global, developed and emerging markets and a sophisticated quantitative investment process are propelling the take-up of Conservative Equities, says Arlette van Ditshuizen.

  • Arlette van Ditshuizen
    Arlette
    van Ditshuizen
    Portfolio Manager

Q. The number of low-volatility options available has grown rapidly. Why invest in an enhanced low-volatility strategy, such as Robeco’s, instead of a generic alternative?

A. It is no wonder that the number of low-volatility options is growing. Investor interest is increasing and it is not too difficult for an asset manager to build a low-risk portfolio: just rank the universe based on volatility or some other statistical measure and select the top 20%.

Our ranking model, however, is much more sophisticated. We reduce risk by using a combination of variables and by including forward-looking measures based on a proprietary distress-risk model. Returns are enhanced by selecting low-volatility stocks which also have attractive valuation and sentiment characteristics.

If there are two stocks that are equally attractive in terms of low risk, we prefer the stock with the best valuation and sentiment. We like to say that no two low-risk stocks are created equal. One will likely have a better future return than the other—and that’s the stock we select for the portfolio.

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

Q. Are there any other advantages?

A. Enhanced low-volatility strategies, such as Robeco Conservative Equity, can overcome recognized pitfalls of low-volatility investing, such as exposure to unnecessary downside risk, high turnover in illiquid stocks and concentration risks. We have put a great deal of effort and research into our ranking model and portfolio construction tool. They are both based on years of experience in quantitative investing in general and low volatility investing in particular.

For example, we have learned over the years that taking a broad view of risk, which incorporates non-statistical measures such as distress risk, can enhance a low-volatility portfolio. We developed a proprietary distress risk model that takes into account how balance-sheet leverage might translate into future distress and which incorporates other forward-looking financial information about a company’s corporate structure. Our distress risk model improves overall performance by helping the portfolio to avoid tail risk and by reducing the severity and occurrence of drawdowns.

Q. How has the strategy grown over the years?

A. After we introduced the global portfolio in October 2006, it seemed natural to expand the Conservative strategy to other equity markets. In September 2007, we introduced the European portfolio and in February 2011, emerging markets. Investors should be aware that we are using the same proven model to select low-volatility stocks in each region. The same model factors are used in developed and emerging markets.

Q. What was behind the development of Emerging Conservative Equities?

A. When we launched Emerging Conservative Equities, we had already been running the developed markets strategy for about five years, and we were convinced of its ability to deliver market returns with less risk. We had also completed research that quantified the volatility effect in emerging markets and also showed that it was increasing over time.

The development of Emerging Conservative Equities was possible because of a unique combination of in-house experience in emerging markets equities, low volatility strategies and quant investing. We had, for example, been managing emerging markets quant portfolios since 2006. And Robeco’s fundamental Emerging Markets team had been investing in emerging markets since 1994 and using Robeco’s proprietary emerging-markets stock-selection model to generate ideas since 2001.

Q. How has performance been?

A. Since inception in February 2011, the Emerging Conservative Equities portfolio has generated an excellent track record with a 26% gross cumulative return versus 2% for the MSCI Emerging Markets Index, as of month-end September 2012. The Robeco portfolio’s return was also achieved with a risk reduction of more than 30%. Assets under management have grown unbelievably fast and are now above EUR 500 million.

Q. Why do you think the Robeco strategies continue to gain client assets?

A. I think our clients are attracted by our good performance across different markets. Our long track record also puts us at the “top of mind” among prospective clients. There are a number of different options to choose from, including generic minimum-volatility strategies, but one reason clients choose Robeco is because our performance is so much better than that of the reference index. We are not oriented toward any benchmark, but we are always pleased for our clients when our strategies show excess performance versus standard indices.

But, of course, performance is just part of the story. Many of our pension-fund clients are also responding to the uncertainty of the economic recovery and looking to harvest the equity risk premium at a lower volatility and to stabilize coverage ratios. They find the capital preservation aspect of the Conservative Equity strategy particularly attractive.

Q. Are clients willing to pay a premium for Conservative Equities compared to a generic index?

A. Yes, our clients are willing to pay a little bit more for Robeco’s low-volatility strategy. This is due to our long-term commitment to low-volatility investing, our research in the area and the integration of risk management into our strategy.

Clients appreciate that there is no “black box” with Robeco’s Conservative Equity portfolios. We can explain every position. Unlike many generic strategies, we are not just ranking stocks based on risk. We do more and it provides a more robust outcome. I think that’s why clients prefer our approach in today´s uncertain markets.

Q. What have you learned running Robeco’s Conservative Equity portfolios?

A. We were one of the first to offer a low-volatility equities portfolio and, from this vantage point, we were among the first to prove that the volatility effect can produce a market rate of return with less risk in practice. This was our premise when we started Conservative Equity, and I have always believed in it. Nonetheless, it is gratifying to see the proof that it works in our successful live track records. For clients who invested with us prior to the financial crisis, it is clear that reducing risk and limiting losses can have a huge effect on long-term returns.

Arlette van Ditshuizen is the co-portfolio manager, with Pim van Vliet, of Robeco’s Conservative Equity portfolios. Together they manage more than EUR 3 billion in low-volatility equities. Van Ditshuizen, who joined Robeco in 1997, has been managing Robeco´s Conservative Equities portfolios since February 2007, when she joined the Quantitative Equity team.

The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

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