Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Syndicated loan wikipedia , lookup
Systemic risk wikipedia , lookup
Securitization wikipedia , lookup
Business valuation wikipedia , lookup
Land banking wikipedia , lookup
Public finance wikipedia , lookup
Stock trader wikipedia , lookup
Investment management wikipedia , lookup
Investment fund wikipedia , lookup
Greeks (finance) wikipedia , lookup
Beta (finance) wikipedia , lookup
OCTOBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT Index Intelligence. Revisiting the low volatility anomaly Compelling empirical support for a low volatility premium has led to significant interest in low volatility factor indices. Minimum variance strategies are also proving popular, but investors should take care not to confuse the two. For professional investors only Low volatility investing Traditional portfolio theory is based on the premise that the market portfolio is the most efficient in terms of risk and return.This theory leads to the conventional wisdom that investment portfolios cannot offer a better risk/return pay-off than is offered by the ‘capital market line’ (Figure 1). At the low end of the capital market line is the ‘risk-free’ rate of return.The further up the line an investment is positioned, the more risk it involves, but the higher its expected return. Simon joined LGIM in February 2012, where he is responsible for Index Strategy, focusing on developing the institutional index management business. Behavioural finance provides support Behavioural finance is the study of why investors may, at times, make decisions that appear irrational.This expanding field identifies several concepts that provide support for the existence of a low volatility premium. This first of these is known as the lottery effect.This is where investors look to invest in assets that only have a small potential loss but a large potential gain, despite the fact that the average outcome might be negative. In this scenario, the possibility of a loss is many times higher than the possibility of a gain.This behavioural bias is much like buying a lottery ticket, and implies that investors are more inclined to overpay for high volatility stocks (with that high potential pay-off) and underpay for low volatility stocks. A second behavioural finance concept that lends support to the low volatility effect is representativeness.This describes how the existence of a handful of successful, Figure 1: Testing the efficient frontier 10.0% Minimum variance portfolio and efficient frontier 8.0% Return Contribution by Simon Midgen – Head of Index Funds Strategy However, a growing body of empirical research indicates that this conventional theory may be incorrect.The evidence from this research points to the existence of a ‘low volatility premium’, or a higher return from holding low volatility stocks. Furthermore, the research suggests that skewing exposure towards lower volatility stocks could provide better returns at lower overall risk.The majority of support for this argument comes from the field of behavioural finance which accounts for the effect of psychological, social emotional and other factors on stock prices. 6.0% 4.0% Max sharpe Min volatility 2.0% 0.0% 0.0% 1.0% 2.0% 3.0% Source: LGIM. For illustrative purposes only 4.0% Risk 5.0% 6.0% 7.0% 8.0% OCTOBER 2015 LEGAL & GENERAL INVESTMENT MANAGEMENT highly volatile stocks is taken as a reason for believing that all stocks in the same vein are sound investments. However, investors regularly ignore the fact that this type of stock can be highly speculative, while low volatility stocks should generally perform more predictably. In a similar way, the agency effect highlights the tendency for low volatility stocks to be ignored by asset managers as they require less attention and support in the form of fundamental research.This leaves them undervalued. Lastly, the illusory superiority bias, or overconfidence, is also thought to provide support for a premium being available in low volatility stocks. Investors are often overconfident in their ability to predict the future and the extent of their differences in opinions are higher for stocks with more uncertainty attached to them. In reality, it is easier and more practical to express a positive view than a negative view, and the result is overpricing, and therefore lower returns, for high volatility stocks in particular. Comparing low volatility and minimum variance investing Investors can look to capture the low volatility factor premium by investing in a Low Volatility Factor Index.This provides exposure to low volatility stocks in order to capture excess returns from company share prices with lower than average volatility, beta, and/ or idiosyncratic risk. Aside from low volatility investing, we are now seeing growing interest in minimum variance investing, where investors seek a portfolio that is designed to have the lowest possible risk while still 02 investing in equity markets. As such, minimum variance investing may appeal to investors who wish to maintain equity market exposure, but desire a controlled level of portfolio volatility, for example as part of a de-risking strategy. Low volatility and minimum variance investing are both valid strategies and investing in index strategies that track them has become increasingly popular in recent years. However, it is important not to confuse the two, as they differ hugely in the outcome they are targeting, as shown in figure 2. Low volatility investing seeks to harness the premium in low volatility stocks whereas minimum variance investing targets index level volatility reduction, with no explicit return objective. Minimum variance investing is therefore designed to manage overall variability, and is constructed with a limited number of constraints to explicitly target volatility reduction through diversified outcomes that do not overly impact trading capacity. With index strategies available that provide access to the merits of both low volatility and minimum variance investing, investors have a growing array of tools at their disposal. However, it is important not to confuse these two similar-sounding approaches and to select a strategy that is appropriate for individual investment objectives. In addition, many investors might wish to combine these strategies with other smart beta factor investing to better control risk and achieve their desired risk/return outcome. Figure 2: Sample indices Objective Capture the low volatility effect Achieve minimum volatility FTSE RAFI All World Low Volatility MSCI ACWI Risk Weighted FTSE All World Volatility Factor MSCI ACWI Minimum Volatility FTSE All World Minimum Variance No. of constituents 413 2480 864 356 1947 No of constituents in parent 3061 2480 3061 2480 3061 Index objective Apply the RAFI fundamental methodology to a universe of low volatility securities Reweight market cap index to give lower risk stocks higher weights Reweight market cap index to give lower risk stocks higher weights Generate lowest volatility Generate lower index volatility Source: LGIM, MSCI, FTSE as at 30 September 2015 For further information please contact: Janice Wu, Head of APAC Sales & Distribution Email: [email protected] Important Notice This material has not been reviewed by the SFC and is provided to you on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance (Cap.571) (the “Ordinance”). By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to a person who is not a Professional Investor as defined in the Ordinance. This material is issued by Legal & General Investment Management Asia Limited (“LGIM Asia Ltd”), a Licensed Corporation (CE Number: BBB488) regulated by the Hong Kong Securities and Futures Commission (“SFC”) to conduct Type 1 (Dealing in Securities) and Type 9 (Asset Management) regulated activities in Hong Kong. The registered address of LGIM Asia Ltd is Room 902, 9/F, Chinachem Tower, 34-37 Connaught Road, Central, Hong Kong. The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general Information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views expressed in this document by any contributor are not necessarily those of the LGIM Asia Ltd affiliates and LGIM Asia Ltd affiliates may or may not have acted upon them. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecast, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. Legal & General Investment Management Asia Limited, 19/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. www.lgim.com Authorised and regulated by the Securities and Futures Commission. M0587_ASIA