Hidden Risks in Low Volatility Funds

Low-volatility strategies have grown popular with risk-averse investors, but they are not risk-free. Instead, they trade market risk for exposure to other risks

Mathieu Caquineau, CFA 7 June, 2017 | 2:37PM
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Low-volatility funds have grown significantly in recent years and investors are learning the shortcomings of such strategies. It has long been evidenced that portfolios of low-volatility stocks have produced higher risk-adjusted returns in the long run than portfolios with high-volatility stocks in most markets. But it is only in the past ten years that low volatility investing has taken off in Europe.

The global financial crisis in 2007-08 and the Eurozone debt crisis of 2011 nourished a growing demand for lower-risk equity products that asset managers have rushed to satisfy. From a dozen specialised low-volatility funds 10 years ago, European investors today have access to around 100 low-volatility strategies, both active and passive.

We estimate that assets managed with a low-volatility approach across Europe reached €39.9 billion by year-end 2016 with a 15%- 85% split between passive and active strategies.

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Mathieu Caquineau, CFA

Mathieu Caquineau, CFA  Senior Fund Analyst, Morningstar France