Tactical Timing of Low Volatility Equity Strategies

13 Pages Posted: 7 Sep 2014

See all articles by Sanne De Boer

Sanne De Boer

Voya Investment Management

James H. Norman

Goldman Sachs Asset Management

Date Written: September 5, 2014


Many investors we speak to are interested in making a strategic allocation to low volatility equities to help them better meet their investment objectives. The appeal of this strategy is clear. Low volatility stocks have historically delivered higher returns with lower risk than the capitalization-weighted market. Moreover, the behavioral and market-structural forces that have been suggested as possible explanations are inherently hard to change, which means the anomaly might not readily disappear. However, we often hear two tactical concerns about the timing of an allocation. The first is that relative valuation of low volatility stocks may be expensive compared to the rest of the market so they should wait for more attractive levels. The second is that low volatility stocks, which tend to pay higher dividends, may underperform against the back-drop of potential rate increases. In this research note we examine the validity of these concerns and also incorporate macro-economic and market considerations by researching which factors have been good drivers and predictors of global low volatility equities’ performance relative to the capitalization-weighted index since 1980. We consider valuation levels, the market environment, and the macro-economic backdrop. We find that relative valuation levels have not been a good predictor of low volatility equities’ relative return. In addition, while low volatility equities’ performance was indeed more sensitive to interest rate changes than the capitalization-weighted index, both delivered similar risk-adjusted returns (Sharpe ratios) in rising-rates environments.

Keywords: minimum volatility investing, global equities, asset allocation

JEL Classification: G12, G15

Suggested Citation

De Boer, Sanne and Norman, James H., Tactical Timing of Low Volatility Equity Strategies (September 5, 2014). Available at SSRN: https://ssrn.com/abstract=2492270 or http://dx.doi.org/10.2139/ssrn.2492270

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

James H. Norman

Goldman Sachs Asset Management ( email )

200 West Street
New York, NY 10282
United States

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