Investors Poured Billions Into This Strategy. It’s Not Panning Out. Assets have surged into low vol funds, but so far investors are not getting what they thought, according to new research. Julie Segal January 28, 2020 John Taggart/Bloomberg Investors expect low-volatility factor funds to give them most of the equity market’s return during good times, while also softening the blow if there’s a correction. But early indications show that these funds have been disappointing investors by massively trailing equity markets, a new analysis shows. With low-vol strategies, investors are willing to give up some of the possible upside of stocks. But if the gap is too large, they could be better off in other conservative options, such as fixed income, according to an analysis by Northern Trust Asset Management. The MSCI USA Minimum Volatility index returned 3.03 percent in the fourth quarter of 2019, almost 6 percentage points below the Russell 1000’s 9 percent return, according to the analysis. The S&P 500 Low Volatility index’s return lagged even further behind the Russell 1000, delivering 1.36 percent. Both indexes are the benchmark for billions invested in in popular low-vol exchange-traded funds and institutional separate accounts. For all of 2019, the MSCI USA Minimum Volatility index returned 27.77 percent, compared with the Russell’s 31.24 percent. “There’s been talk of factors no longer working,” said Mike Hunstad, head of quantitative strategies at Northern Trust’s asset management division. “But it’s not that. It’s how these indexes and other products are designed. There’s plenty of academic research that these premia work, but none of it tells you how to implement them in real life.” Special Report: A Clear Roadmap to Navigating Your Plan’s LDI Challenges [/paste:font] Hunstad said specifically that low-vol funds are being compromised by a lack of limits on risks, such as the size of bets on certain sectors of the markets. For example, low-volatility stocks are concentrated in stock categories such as real estate investment trusts, utilities, and consumer staples. “These bets, though, are unintended,” he said. “A lot of investors don’t even know that their low-vol funds are also taking style bets like size and value. And these bets have not paid off,” According to Hunstad, asset managers need to account for the unintended risks and create portfolios that better represent low vol stocks that investors expect. [II Deep Dive:What Asset Managers Don’t Want You to Know About Their Factor Funds] Not all low vol funds missed the mark. The Northern Trust Asset Management Quality Low Volatility U.S. Large Cap Strategy delivered 6.53 percent in the fourth quarter, compared with the Russell 1000’s 9 percent, according to institutional database eVestment. The Martingale Large Cap Defensive portfolio returned a net 6.11 percent in the fourth quarter of 2019, and 26.78 percent for the year. In addition, Acadian’s US Managed Volatility fund returned 5.25 percent for the fourth quarter and 24.86 percent net in 2019, according to eVestment. The Northern Trust strategy's 2019 return was 30.71 percent. As a result, there are significant gaps in the performance of low-vol strategies that look very similar when analyzed on a superficial level. “Without controls, exposures can run amok with sector, macro, and stock specific risks,” said Hunstad. https://www.institutionalinvestor.c...llions Into This Strategy Its Not Panning Out
Not panning out? Just invested in the Min Vol Index to return 27.77% instead of 3%. But that would be too easy, so they needed to screw it up to show they were worth their salt.
What's the 3% you're comparing it to? A CD? You have to compare apples to apples. "Low-vol" funds/stocks can still have drawdowns almost as large the S&P 500 in a crisis.
Nothing beats the stock market returns! Haha. I remember this back in 2007. My biggest investor took all their money out year end because I grinded out 10% in long vol strategies and his other funds made 20% just by being long the market. They got out at the worst time. 2008 and 2009 were my best years ever!
Sorry I was thinking about hedge fund returns vs SP500 indexing. I have no idea what the average low vol funds were returning vs low vol indexing of 27.77%. They returned ~2% per year from 2007-17. So I stand corrected.
Low fee index funds will blow up the market. Active managers kept the market efficient. Without them market is just a function of fund flow. It's going to be ugly and inefficient.
"A strategy designed to have lower volatility than the market had slightly lower returns than the market in a year in which the market was up" Even by the poor standards of financial journalism, this is pathetic. Not saying that low-vol investments don't have their issues, but criticising them based on one year of performance in which they did exactly what they said on the tin is silly. GAT
What's the 3% you're comparing it to? A CD? You have to compare apples to apples. "Low-vol" funds/stocks can still have drawdowns almost as large the S&P 500 in a crisis. Got it. Yes, hedge fund have been a huge disappoint overall. You'd think more retail traders would learn a lesson from them, too. If hedge funds can't beat buy-and-hold, can I really make a consistent 10% monthly trading options, FX or whatever? As for low-vol, it's pretty easy to understand. Any time a relatively unknown asset class outperforms popular indexes for multiple decades, mean reversion is just around the corner...especially when it suddenly becomes popular and investors pour their funds in by the billions. There's still no free lunch.
%% That; + they seldom make up for it on the upside.However lower volume funds can do better, may or may not have more slippage over a long period.................................................