(April 24, 2012) — Investors’ thirst for outperformance following years of poor returns has provided a boost to those committed to the low volatility investment approach, which is attracting increasing numbers, experts say.
The recent rush of active fund managers picking what they hope to be the highest moving stock for clients desperate for returns has meant a feast of opportunity for low volatility investors.
Human behaviour when choosing investments has contributed to this ‘low volatility anomaly’, according to Pim van Vliet, PhD, Portfolio Manager at Robeco.
Van Vliet told aiCIO: “Stock pickers promising absolute return funds are in demand from investors. These stock-pickers usually go for high volatility stocks – the excess demand for which then drives up the price and volatility, leaving others the opportunity to buy stocks that are less volatile and the sector is getting larger.”
The lure of low-volatility stocks is their long-term performance, van Vliet said. The anomaly has lasted over 80 years, according to low-volatility pioneer Robert Haugen, and will continue to perform when the current financial crisis has passed.
Van Vliet said: “The Netherlands was the first nation in Europe to really embrace the approach before the crisis, then over the last two years we have seen pension schemes large and small allocate to the strategy. Such is the popularity that in the Netherlands it is more of an ‘opt-out’ if you don’t invest in this way.”
Robeco, which is one of the largest low-volatility investment managers in the world, has gathered over €2.2 billion in clients assets over the past couple of years.
“Scandinavian and United Kingdom investors, Swiss and German investors too, have also been quick to take to the strategy with some serious mandates coming out of these nations,” van Vliet said.
“We were also surprised how quickly investors in Asia – particularly in Japan, Korea, Singapore and Hong Kong – understood and wanted to access the concept.”
Last year, a low-volatility ETF launched by Invesco was one of the largest asset gathers, with over $700 million in little over six months.
Existing investors are also giving more assets to the approach, according to van Vliet. He said that allocations by Robeco’s clients were increasing on a quarterly basis.
“Some fund managers see that if they are given an incentive for outperformance – fees, for example – they buy risky assets that might go down, but as performance is often measured in the short-term they get the chance to do it all over again and this is fuelling the anomaly.”