Lazard Asset Management produces cure for volatility fatigue

Susanne Willumsen of Lazard Asset Management explains why lower volatility equities do not equal lower returns. In fact, quite the opposite can be true.

Lazard has launched a fund, Lazard Global Controlled Volatility fund, based on the premise that lower volatility can actually make better returns.

The firm’s global quantitative equity team will try to make returns similar to the market (MSCI World), on 20% to 40% less volatility.

In support of this, the MSCI Minimum Volatility index made just over 6% on about 12% volatility over the decade to June 2011. By comparison MSCI World Free cap-weighted index of global shares made about 4% on about 16.5% volatility.

Susanne Willumsen (pictured), one of two lead managers on Lazard’s fund, says there will be “pockets of brilliance” in high-risk stocks’ performance, and people will chase these.

But these will stop if bubbles burst.

She adds: “Investors are increasingly frustrated with the amount of volatility in their portfolios, and the effect that is having on their overall funding volatility.

“But you do not have to chase the very ‘compelling growth stock’ stories. Instead you could invest in high quality defensive companies that have historically performed as well as the market, but with significantly lower risk in sectors such as tobacco, food and beverage makers.

“You do not find active managers talking about their ‘big bets in tobacco stocks’. But over time people move back into defensives, moving them back to fair value. Our research shows that investment in lower volatility equity portfolios results in returns that can be similar to that of the broad market.”

Lazard’s Ucits fund, which consciously seeks companies with characteristics of low price volatility, has a beta of 0.5 to 0.8 and volatility 20% to 40% below the market’s over a market cycle. It made almost 10% on just under 12% annual volatility over the decade – broadly resembling a hedge fund’s profile.

 

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