Nov 09

Managed Volatility…the next popular equity strategy

There’s a brief article in today’s Investor Daily News that comments on “Managed Volatility” being the strategy to maximise returns…article here. I have to admit that I believe this strategy will be one of the new trends in equity focused managed funds over the next 12 months or so. Empirical evidence over the years the risk adjusted outperformance of broad benchmarks by value (low Price to Book), Small Companies, and Momentum styles. The latest anomaly to garner support includes low volatility; which is the outperformance of benchmarks by portfolios that remove the riskiest stocks. Apparently applying this simple methodology has worked in all markets tested across all time frames (with available data). Whilst to the lay investor this volatility anomaly may make sense (let’s face it they never really wanted the risky stocks to begin with), it actually challenges modern portfolio theory that has always suggested that high returns can only be achieved by accepting high risk…well, apparently not.

I believe this managed volatility approach to equity investing may prove to be incredibly popular in the years to come. The attraction will be pretty simple…if the evidence suggests I can get strong equity returns with lower volatility then why wouldn’t I be attracted. Of course, once it goes mainstream I’m sure the anomaly will be arbitraged away and investors will feel duped yet again, but perhaps that’s the half glass empty researcher in me coming through.

Either way, equity returns, lower volatility has to be attractive to the retiree looking to drawdown high percentages in these days of low interest rates…so I look forward to seeing the next low cost managed volatility index strategy…it should be a worthy contender for the diversified portfolio.

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