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Decline

21-07-2022 · Insight

Quant chart: Winning by losing less

Low-risk investing tends to deliver higher risk-adjusted long-term returns than the market as it tallies wins by losing less in down periods. Amid the volatile environment witnessed in the first half of 2022, this has been the case again as low-risk strategies have provided investors with valuable downside protection.

    Authors

  • Matthias Hanauer - Researcher

    Matthias Hanauer

    Researcher

  • Jan Sytze Mosselaar - Portfolio Manager

    Jan Sytze Mosselaar

    Portfolio Manager

Low-risk strategies such as Conservative Equities are designed to provide risk reduction in volatile down markets, which typically comes at the expense of lagging in strong bull markets. Over an investment cycle characterized by these ups and downs, the compounded long-term returns tend to be similar or higher than the market, resulting in higher risk-adjusted returns. This effect can be epitomized by the catch phrase ‘winning by losing less’ and is contrary to the belief that higher risk leads to higher returns in the long run.

Figure 1 visualizes this concept of downside protection by showing the excess returns of the lowest volatility quintile portfolio versus the market, alongside the corresponding market returns. The months are then ordered from the lowest market returns to the highest.

Figure 1 | Winning by losing less, January 1986 to June 2022

Figure 1 | Winning by losing less, January 1986 to June 2022

Source: Refinitiv, Robeco. The chart shows the monthly excess returns of the lowest volatility quintile portfolio versus the market, alongside the corresponding market returns. The months are then ordered from the lowest market returns to the highest. Volatility is measured as the past 156-week return volatility. The investment universe consists of MSCI World and MSCI Emerging Markets indices constituents. Before 2001, we use the FTSE World Developed Index for developed markets (going back to December 1985) and the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance for emerging markets (going back to December 1995). The portfolios are value-weighted and rebalanced monthly. The sample period is from January 1986 to June 2022.

This illustrates how low-risk strategies are typically useful for investors when they most need protection. Building on more than 150 years of evidence which demonstrates the efficacy of the low volatility anomaly, low-risk stocks have yet again demonstrated their defensive characteristics by providing risk reduction in months when the market has charted into negative territory this year. As a result, low-risk strategies have delivered better year-to-date returns than the market.

Low Volatility investing: now more than ever?

There is an expectation that the current market volatility will continue to persist in the foreseeable future given the looming risk of recession, stubbornly high inflation, unstable geopolitical situation and normalization of monetary policy which is leading to higher real yields. Against this backdrop, we believe there is a case for low volatility investing now more than ever.

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In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management UK Limited (“RIAM UK”) is authorised and regulated by the Financial Conduct Authority. RIAM UK, 30 Fenchurch Street, Part Level 8, London EC3M 3BD (FCA Reference No:1007814). The company is registered in England and Wales under Ref No. 15362605.

In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.