How to Improve the Potential of Less Volatile Stocks
"Slow and steady wins the race," when it comes to low volatility stocks. But combining this with a few different strategies can be even more fruitful for investors.
By Joseph G. Paul
The well-documented tendency of less volatile stocks to outperform the market over long periods aptly illustrates the old adage slow and steady wins the race. Our research shows that combining quantitative and fundamental strategies for exploiting this anomaly is likely to be more effective than using any single approach
Strategies designed to tap the low-volatility anomalys risk/reward potential have gained a lot of attention in recent years as investors have sought ways to minimize downside equity risks. Some strategies focus solely on reducing the symptoms of stock-price volatility or beta: among these are so-called minimum-variance strategies. Other approaches emphasize the fundamental causes of stock volatility, in many cases explicitly targeting the stocks of high-dividend payers and/or high-quality, stable-growth companies, which are inherently less volatile.
As my colleagues Kent Hargis and Chris Marx wrote in a recent white paper, The Paradox of Low-Risk Stocks: Gaining More by Losing Less, each of these strategies is effective, but each has blind spots. An exclusive focus on buying less volatile stocks tends to leave portfolios vulnerable to risks that cannot be detected through the historical lens of most quantitative risk models. It also tends to overlook potential fundamental drivers of return. ....