Getting the most out of low-vol investing

Getting the most out of low-vol investing

27-08-2012 | Insight

Do you know why it makes sense to invest in an enhanced low-volatility strategy rather than a generic alternative?

  • Pim  van Vliet, PhD
    van Vliet, PhD
    Managing Director, Head of Conservative Equities

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.

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.

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.

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

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

Source: Robeco


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