Unigestion identifies ‘crowding’ in low volatility equities

The popularity of low volatility equities means that investors run the risk of ‘crowding’ in which the sheer weight of new money being invested could impact the behaviour of individual stocks and thereby portfolio performance, boutique manager Unigestion has warned.

The manager, which has some $14bn in AUM, says that in this environment, it is imperative that investors conduct sufficient qualitative analysis of the assets they are considering buying.

According to Unigestion’s analysis, the evidence of a crowding risk is highest among European and emerging market equities, especially in the small to mid cap segment. US equities are less affected because of the general liquidity in that market.

“The potential risk of crowding in low volatility stocks is just one example amongst several emerging risks which demonstrates that the true overall risk of a stock cannot be assessed by quantitative analysis of historical data alone,” the manager stated.

“Unigestion therefore recommends that specific qualitative checks and analysis should be incorporated into low risk investment strategies in order to control more effectively for these emerging risks.”

Alexei Jourovski, managing director, head of Equities, at Unigestion added: “Investment risks will change over time and it is vital that equity strategies also evolve to successfully address these. The highly changeable market conditions of recent years have brought low volatility into vogue, but the popularity of such strategies has itself created a range of new challenges for asset managers. Not all risks can be measured by numbers alone, and qualitative analysis should therefore be a cornerstone of investment practices to ensure clients’ risk and return requirements are fully met.”

 

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