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>>>Low Volatility strategies … more active than you think!

04 November 2016

Low Volatility strategies … more active than you think!

Low-volatility portfolios have noticeable features. Their sector exposures vary over time(eg. financials) and they can be biased towards defensive (non-cyclical) sectors such as utilities and consumer staples. Similarly, low-volatility portfolios vary when compared to the main style factors, but have specific biases as we show underneath.

 

The above charts depict style exposures of US and European low-volatility portfolios from January 2000 to September 2016. Styles exhibit significant levels of dispersion. The interaction with Price Momentum clearly reflects this phenomenon: the wide range of Momentum shows that Low volatility and Momentum diverge and converge very strongly according to market cycles.

Additionally, the analysis shows that low-volatility portfolios are likely to be biased towards large cap stocks, high-dividend paying stocks, as well as companies with good fundamentals.

In conclusion: Low-volatility is an adaptive strategy that dynamically allocates across styles through time, but is also prone to long-run style bias such as dividend yield, market cap and quality biases.