Interest Rate Sensitivity and Low-Vol Investing

Interest rates have a significant impact on security prices, according to an article by Morningstar’s Alex Bryan, CFA, the firm’s Director of Passive Strategies Research, North America. Bryan writes that, unlike bonds, which have a finite life and fixed cash flow, the impact of rates is more difficult to anticipate for equities. He explains his theory that firms that are “more sensitive to the business cycle tend to experience greater cash flow growth during economic expansions” and, therefore, should do better in a rising rate environment. Bryan discusses his research that shows high-dividend-yielding stocks, those stocks in more defensive industries, […]

What Rising Rates Mean to Low-Vol Investors

“Confusing risk with volatility can be dangerous,” says a recent report by Greenline Partners, as it “can lead to seeing things that do not exist.” This according to an article published this past May in Chief Investment Officer. Greenline, the article states, found that low-vol strategies outperformed the index by nearly 1%-2% annually over the last 50 years, but two-thirds of this period coincided with falling rates. A recent report published by the asset management firm said, “We think this environment gave low-volatility investing a tailwind that will likely not repeat going forward.” Future return expectations should be discounted “especially […]

The Irony of the Low-Volatility Binge

Investor appetite for low-volatility mutual and exchange-traded funds isn’t new. However, it seems to be reaching the point of gluttony. Bloomberg reports that this month, (for the first time), combined assets in the PowerShares S&P Low Volatility fund and the iShares Edge MSCI Minimum Volatility USA ETF reached $20 billion. But as investors continue to flee the rest of the equity markets (yanking almost $60 billion from U.S. stock funds this year alone), the mass inflow to the low-vol funds is making the shares in those funds more expensive, leading to more price swings and, ironically, volatility. Although not designed to do so, the PowerShares fund is beating the market this year (up 3.4% to date […]

Popularity and Price Increase for “Low Vol” Funds

“Low volatility” funds have surged in popularity recently as investors have poured nearly $10 billion into them so far in 2016, which has significantly increased their price. At the end of 2015, one such “low vol” fund (i.e., specializing in stocks that fluctuate less than the broader market) had a P/E ratio just above the market as a whole. By the end of April 2016, it was “nearly 10% more expensive than the market average,” reports a recent Wall Street Journal blog piece. Nardin Baker of Guggenheim Partners Asset Management, who has written on and managed such funds for decades, […]