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The low volatility anomaly in equity sectors – 10 years later!

Outlooks & Research Papers

Raul LEOTE DE CARVALHO
 

A decade ago, BNP Paribas Asset Management launched the global low volatility equity strategy after undertaking proprietary research into the characteristics of low risk stocks.

One of the key elements of the research was evidence that the least volatile stocks among every sector had a higher Sharpe ratio than those of the riskier stocks in their cohort. In other words, the low volatility anomaly was omnipresent: It was not just confined to those sectors typically viewed as less  volatile such as utilities, consumer staples or healthcare.

This finding led us to launch the Global Low Volatility Equity strategy, which is designed to deliver higher risk-adjusted returns and lower volatility than a comparable market capitalisation index by investing in the least volatile stocks across all sectors globally.

This year, a decade after launching the strategy, we revisited our research to ascertain if our initial analysis still holds true. Were the least volatile stocks from each sector more attractive than their riskier peers on a risk-adjusted return basis?

As we explain in this new research paper, the answer is a resounding ‘yes’. If anything, the results are even stronger, defying the notion that once an anomaly is discovered it tends to be arbitraged away. In our view, the low volatility anomaly is as alive and kicking as it was ten years ago.

Read: The low volatility anomaly in equity sectors – 10 years later!

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

 

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