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>>>Minimum Variance - The power of unconstrained

13 July 2016

Minimum Variance - The power of unconstrained

At Seeyond, we believe in exploiting the low-volatility anomaly in its purest form. A couple of weeks ago we discussed (cf. “Minimum Variance – where is my style”) how Minimum Variance (or Minimum Volatility) investing can be very active in nature by looking at the evolution of its style exposures and the outperformance correlations with the same style factors.

This week, we look more specifically at the active nature of Low Volatility investing and its ability to generate alpha in Equity long-only portfolios.

We have compared low-volatility portfolios that are either unconstrained or with industry-level weight constraints across Europe, US and Japan.

Source: Seeyond. January 2000 to December 2015. Average alpha is based on linear regressions applied to several factor-data sets. In above graph, we use 4 different time-widows to compute rolling-betas (65, 130 260 and 780 days) and 10%, 20% and 30% least volatile stocks with a liquidity constraint.

The above graph shows the power of unconstrained low-volatility portfolios. Constrained and unconstrained low volatility portfolios are compared across holding periods, bucket sizes and geographies and unconstrained systematically generates higher alpha over time.

Looking at styles recently, we concluded that Low Volatility investing is anything but static. And it shouldn’t be: Constraining low volatility investing reduces your alpha.

The same applies to Minimum Variance (or Minimum Volatility) investing. We strongly believe that by allocating without constraints on sectors, countries and market cap, we will generate the alpha of tomorrow’s low-volatility investing.