Low Volatility Real Benefit Risk Reduction

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    Low volatility equity strategies are a third dimension of style, taking relevant parts from value and growth investing, says Paul Martin, institutional portfolio manager at RBC Global Asset Management. Speaking on ‘The Next Evolution In Investing: Low Volatility Strategies’ at ‘Quant Invest Canada 2012,’ he said, however, the way they are being marketed is dangerous. A nascent strategy with strong merit and potential, the marketing to date has focused on returns because its origins are found in an observation that returns from low volatility stocks are higher than for high volatility equities. Thus, it is only natural to market them using this information. The problem is that studies over relatively long time frames show while it outperforms in a majority of four-year rolling periods, it underperformed 43 per cent of the time. This means, he said, the tracking error in these strategies is huge. The real benefit is they can be used to take the most volatile part of a portfolio and reduce its volatility by up to 25 per cent. This, in turn, frees up room in the risk budget allowing investors to own more risky assets elsewhere in a portfolio.