‘Low Vol’ in Name, Big Losses in Practice

The popular strategies failed to live up to their labels in the Covid Crash, per PanAgora.

Illustration by II

Illustration by II

In recent years, investors have poured cash into low volatility stocks, hoping to soften the blow of the inevitable market correction on their portfolios. But these stocks have done little to protect investors from the wild markets that started earlier this year when the spread of Covid-19 shut down economies around the globe.

In theory, stocks with less volatility than the broader market underperform when equities are rising, but should hold up better during downturns.

Low volatility strategies didn’t do that this time around. The pandemic may have changed the characteristics of stocks considered to be defensive, according to new research from $30 billion investment firm PanAgora Asset Management, which manages money using quantitative and fundamental techniques. PanAgora’s examination of low vol comes as investors and academics have been questioning the data and behavior of other widely used factors — stock performance characteristics — like value. By some measures, value stocks have underperformed for two decades.

In a paper only for clients, but obtained by Institutional Investor, PanAgora addressed the odd behavior of low vol stocks within the Standard & Poor’s 500 index in the early part of the Covid-19 meltdown. It also examined how the pandemic has differed from prior crises and how these anomalies affected the performance of low vol equity strategies.

PanAgora first looked at the initial downturn of markets.

Between February 26 — when the first U.S. case of Covid-19 was announced — and March 31, 2020, some of the largest low vol strategies defied investor expectations, including the Invesco S&P 500 Low Volatility ETF and iShares Edge MSCI Minimum Volatility USA ETF, according to PanAgora. The S&P 500 lost 17.22 percent during the period, while the Invesco ETF and iShares fund lost significantly more than that. The Invesco and iShares funds lost 20.29 percent and 18.35 percent, respectively.


Nicholas Alonso, director, multi-asset at PanAgora and the author of the paper, argues that low vol stocks during the COVID-19 downturn performed like similar securities during the last global financial crisis. That disruption was broad and hit many industries, even though it was largely driven by the financial sector. Low vol strategies did alright because they were less exposed to dismally performing financial stocks. But the strategy held up far better in 2000 when the technology stock bubble burst. Low vol funds at that time had low weightings in tech stocks, which imploded.

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In 2020, a company’s ability to survive depends on its sensitivity to a new concept: social distancing. The end result of forced shutdowns was a surprising number of stocks that acted quite differently than they have historically.

As just one example, a company like Sysco Corp., which delivers items to the food service industry, is typically a low vol company and provided significant protection in 2008. But not this time around. With the food service sector decimated by social distancing requirements in the pandemic, Sysco lost more than twice as much as the S&P 500 in the first quarter of 2020, according to the report.

PanAgora said the government’s intervention, including direct stimulus and the Federal Reserve’s efforts to support credit markets, changes stock winners and losers.

But Alonso expects the government’s response to reduce the likelihood that businesses will fail. Once the economy stabilizes, he argued, historically low volatile sectors, such as utilities and consumer staples, will revert to their classic behavior. That’s because nothing has fundamentally changed about the quality of their operations and other characteristics that make them low volatile in the first place.