EXECUTIVE SUMMARY
- Portfolio managers have run defensive equity strategies for decades. Low volatility has become an important factor in the 10 years since the 2008 financial crisis.
- The low volatility anomaly challenges the conventional wisdom about risk and return—low volatility stocks, by definition, exhibit lower risk, but they have also outperformed their benchmarks over time. This phenomenon is observed universally across the globe.
- Low volatility strategies also exhibit a distinctive pattern of returns that is observable across capitalization tranches and geographic regions. They offer protection in down markets and participation in up markets.
- Low volatility’s performance benefits from an asymmetry. Return dispersion tends to be above average when low volatility outperforms, and below average when low volatility underperforms.
INTRODUCTION
Low volatility investing gained immense popularity in the last decade. A proliferation of passive investment vehicles based on this concept attracted more than $70 billion in assets globally as of the end of February 2019.
The low volatility phenomenon is not, however, a new concept; academics first wrote about it more than four decades ago. Low volatility strategies are familiar in the investment world; portfolio managers have sought volatility reduction, explicitly or otherwise, for as long as there have been portfolio managers.
In the U.S., the S&P 500 Low Volatility Index was the first index vehicle to exploit this phenomenon systematically. Since 1991, the index has outperformed the S&P 500; more importantly, it has done so at a substantially lower level of volatility. Furthermore, the phenomenon is found in all markets segments and regions we have observed.
