A few weeks ago I had a chance to speak with Robert Haugen, a man considered by many to be the father of low volatility investing. Back in 1972, Haugen and another professor, A. James Heins wrote a paper called On the Evidence Supporting the Existence of Risk Premiums in the Capital Market that contained a revolutionary (and controversial) finding: US stock returns from 1926 to 1969 had a negative risk-return relationship. The paper presented a clear challenge to the prevailing investment wisdom of the time (the efficient market theory) and as such they had a hard time getting it published.
Today, Haugen and Heins’ work has garnered much respect and attention from investors who’ve been sorely damaged by extreme market volatility over the last ten years. As they question whether or not the equity risk premium actually exists, a new generation of low vol and minimum variance strategies are coming into the marketplace, particularly in the ETF space where a host of minimum variance and low vol products are now available.
Now, some of these are making headway in the pension space. According to Pensions &Investments, the $43 billion United Nations Joint Staff Pension fund has added a low vol equity strategy to its portfolio, with an allocation that has grown to over $500 million. What’s interesting is they’ve done so by using ETFs. As the article noted:
The premium placed on ease of implementation was one reason officials opted to implement the low-volatility allocation using iShares exchange-traded funds from BlackRock (BLK) Inc. (BLK)….Lower costs, liquidity and transparency also counted in favor of using ETFs.
The fund’s staff is pleased with initial results of the strategy. In all, it has allocated 1.3% of its assets to low vol strategies –2% of its equity allocation. Some of the ETFs used by the UN pension fund have been in available in Canada since July.
This is promising news for low vol strategies and for ETF providers eager to crack the pension space. The question is, how will these strategies perform in different kinds of markets – and can they handle extreme market volatility (ie, the kind that came with the Knight Capital debacle and the 2008 Financial Crisis?).
To help answer that question (or raise new questions) I’ll leave you with a few of recent opinions on the low vol space and on low vol ETFs:
Reuters columnist James Wasik explains why low vol strategies might not work during times of heavy volatility.
Seeking Alpha explores the data around low vol’s recent outperformance
Nasdaq describes the ins and outs of three low vol ETFs for stormy markets.