Low Volatility Investing Methods & Their Merits

Low Volatility, Attention & Asset Growth
The Facts Regarding Excess Returns
Low Volatility’s Four Flagship Factors
Did Volatility Break Value
Downside Redemption
Considerations for Timing
Low-Volatility & Ranked Securities

Low Volatility, Attention & Asset Growth

Infused with the vicissitudes of quarreling politicians, growing mountains of debt and stagnant economies in much of the developed world, investors have been faced with a virtual bull market in “worry” and, oddly, an actual bull market in U.S. equities over the last couple of years. Kiplinger’s magazine, citing data from TrimTabs, recently noted that in the first half of 2012 stock mutual funds and ETFs saw net inflows of only $6 billion.² As the sharp pains from the severe drawdowns experienced in 2008 collide with the growing sense of missing out on the inexorable advance of U.S. shares, people have flocked to products that promise much of the upside with far less of the downside. Chief among the beneficiaries of the newfound obsession with geometric returns appears to be “low-volatility” products which have begun showing up in force across the investment universe.

Kailash Concepts, LLC has watched with growing interest as numerous thoughtful articles have appeared in publications such as Barron’s, The Wall Street Journal and Institutional Investor. While the approaches vary, ultimately all these articles grapple with a relatively old and well-researched concept that higher returns are not always associated with higher risk, as well as the tendency for low-volatility strategies to outperform in negative market environments. Academics have been analyzing the risk/return issue for decades as it seems to conflict with the concept of market efficiency, but investor interest is a relatively new phenomenon. Looking just at ETFs, we can see the category has gone from non-existent to a multi-billion dollar product suite in just over one year, and by no means do ETFs capture all the various conduits by which investors can tap into this concept.

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SERVICES

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

SOURCES

Reprinted with permission of Knight Capital. Kailash is not affiliated with Knight Capital. See infra.
Janet Bodnar. “From the Editor.” Kiplinger’s Personal Finance. November 2012.
All But Micro (ABM) Universe includes companies with a market cap greater than ~$500 million in today’s dollars, excluding any companies with both a market cap less than ~$5 billion and a share price less than $3.
On a value-weighted basis the historical excess returns that accrue to various quintiles of volatility approximate zero across all quintiles.
To be specific, on a count-weighted basis we find that low volatility’s excess returns underperform a simple earnings-to-price ratio by roughly 200bps per year, on average.
If you would like information on the methodology and outcomes of our low-volatility sector analysis please contact your Kailash Concepts, LLC sales representative.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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