Eastspring Investments highlights that several investors are carried away by stocks that dominate the news, which can be unpredictable and risky. According to the asset manager, investing in less exciting stocks which exhibit steady and predictable growth over time can be more effective in the long term. This is also known as “low volatility investing,” which leads to a portfolio with fewer fluctuations in value.
“A low volatility portfolio helps to balance performance over time by losing less in negative market periods while still participating in positive market periods, albeit to a lesser extent than the broad market,” explains Michael (Xiaochen) Sun, Director, Quant Capability at Eastspring.
Drawing parallels with the “hare and tortoise” story, Sun says, “Like the tortoise, a low volatility portfolio may not be the fastest, but it can ultimately win the race.”
Based on an analysis by Eastspring, low volatility strategies have historically achieved gains during positive market phases (upside capture) and a limited degree of downside capture, leading to superior risk-adjusted returns.
Subsequently, the asset manager highlights that in recent times, investors have used passive strategies in portfolios. As these strategies become more popular among investors, they can induce market distortions, causing prices to detach from a logical evaluation of the underlying company, opines Eastspring.
Chris Hughes, Portfolio Manager, Quantitative Equity Strategy at Eastspring, says, “Low volatility portfolios do not suffer from this problem because they weight stocks based on volatility, not valuation; these portfolios do not mindlessly buy more of a company during a market mania.”
Eastspring also informs that diversification across sectors, countries, and stock levels makes the low volatility investing a holistic strategy. The asset manager also indicates that low-volatility equity portfolios help investors navigate business cycles smoothly without worrying about market timing.
“As we enter 2024, investors are facing a high degree of uncertainty, with ominous headlines dominating the news,” cautions Hughes. Hence, he recommends long-term investors to consider low-volatility solutions.
“By doing so, investors can maintain their equity exposure and capitalise on the long-term equity premium, while mitigating potential losses, reducing concentration risk and diversifying performance sources in these uncertain times,” the portfolio manager elaborates.
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