Quantitative investing should be easy to understand. In a new research paper,1 Pim van Vliet and David Blitz explain how a simple investment formula based on three variables (the Conservative Formula) can outperform the market by a wide margin in the long run. Does this mean that all investors should set up their own low volatility strategies? Not necessarily.
“Last year, I co-wrote a book on low-risk investing with my colleague Jan de Koning2, which introduced this simple investment formula based on three variables: volatility, payout yield, and share-price momentum. The book was intended for a broad audience and presented the main results in a very accessible way.
“Since then, however, I have felt the need to dig deeper into the robustness of the formula, to check if it passes all the hurdles and tests that are usually applied to rigorous academic research. And that is what this paper is really about. In a way, it can be considered a follow-up to the book, but also a kind of teaser for those who haven’t read it yet. The paper has in fact enjoyed great popularity since we posted it on SSRN3 last month.”
“For those who have already read the book and are looking for more in-depth analysis, this paper provides more detailed evidence based on a slightly longer data series. At the same time, the paper may encourage other investors who don’t know about the book to read it and become more familiar with low volatility investing and how we approach this at Robeco.”
“If you really bring it down to the basics, yes: it can be done very easily at home. If you read all the existing academic literature and listen to the debates around factor-based investing, you might think: ‘Wow, I’m lost’. So, our objective is to bring things down to the essentials: three key ingredients that lead to positive exposure to well-vetted factor premiums.”
“I often say that we should sell ‘quant’ to ‘non-quants’. Robeco is a well-respected ‘quant’ house, but the quantitative investment market remains a niche. So, as a professional asset manager, if you can explain in a very simple and accessible way what quantitative investing is about and people understand it, you can aim for a much bigger market. Some investors may choose to do it themselves, but the vast majority won’t.”
“The reason is that the devil is in the details: execution is key and the actual implementation of quantitative strategies can be quite demanding in terms of resources. You need to consider issues such as how to implement your positions in practice, how often you need to rebalance your portfolio, how to minimize turnover, how to manage investment flows and how to deal with transaction costs.”
“So, we are not revealing our secret ingredients by explaining this simple investment formula. We are simply sharing three of the variables that we take into account in our models and showing that the combination of these three elements is very powerful. We are also showing potential clients that they could actually do it themselves, if they want.”
“This is very important because it is the level of understanding that we would like our prospects to have. We want to make sure they understand what we do and our investment philosophy. But we also want them to recognize that execution is key and that there are some implementation issues that they can delegate to Robeco.”
“Our ultimate goal is to promote quantitative investing, in particular factor-based defensive investing. We want to show as large an audience as possible that this empirically-tested way of investing can be easily understood and that Robeco is good at translating scientific insights into simple and reliable solutions. The paper and the book are just another way to get this message across.”
“I don’t think so. As I said, the devil is in the details: implementation and execution remain crucial. Many empirical studies, including some carried out by Robeco’s Quantitative Research team4, show that naïve low volatility strategies, frequently offered through low-cost ETFs, and the more sophisticated ones, such as Conservative Equites, do not lead to the same investment results.”
“For example, one common pitfall of low volatility ETFs is that they are too transparent, because they are often based on publicly available indices. All market participants know which trades are going to be executed and some investors can take advantage of this. Once people see the pitfalls of generic low volatility investing, they naturally turn towards active asset managers such as Robeco, who address all of these issues.”
“The paper and the book were not designed as sales material for Robeco products, but they can be considered part of our overall knowledge-sharing effort. And we have tried to do this in a very balanced way, giving the reader an overview of the different options available, from the ‘do-it-yourself’ approach to the sophisticated actively-managed funds. I see this as a sign of strength: we’re confident enough about our position in this market.”
1 P. van Vliet and D. Blitz, The Conservative Formula: Quantitative Investing Made Easy, March 2018.
2 P. van Vliet and J. de Koning, High Returns from Low Risk, Wiley, December 2016.
3 The Social Science Research Network (SSRN) is an online platform dedicated to the dissemination of academic research.
4 See for example: D. Blitz, ‘Factor Investing with Smart Beta Indices’, 2016
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the 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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.