Susanne Willumsen of Lazard Asset Management explains why lower volatility equities do not equal lower returns. In fact, quite the opposite can be true.
If they embraced low volatility stocks, instead, she says the amount of risk discount versus the market would contract “because the benchmark would become more efficient, as defensive stocks would trade as they should, and higher risk stocks would not be chased as much. It would be a good thing – but not something that will be arbitraged away soon.”
Willumsen notes the risk discount for low volatility equities differs by region and market cap, but the theory holds across the US, Japan, Europe and EMs.
“Perversely, perhaps the best time to buy this strategy is when its returns have underperformed market-weighted benchmarks. The way you might gauge if it is a good time to buy it is by looking at the valuation of lower and higher risk stocks.”
Willumsen says it is leverage – afflicting a sector as in late 2008, or sovereigns more recently – that determines volatility in the short term.
“Leverage alters the whole market and perception of risk within the market, and how the market behaves. We take into account price movements over the past six months, and extract from those which risk factors markets care about.
“But fundamental risk characteristics are driven by longer-term risk characteristics. We have a risk-driven process. You often find bubbles occurring at sector level, so we diversify sector risk beyond the benchmark. The issue of companies’ sensitivity to interest rate risk is a very important risk driver, as is the oil price.”
The Ucits compliant fund has a team of nine people behind it, including co-lead manager Paul Moghtader in Boston, and holds about 250 to 350 stocks. Its annual turnover is anticipated to be low, at about 40% to 60%.