Investor Psychology and Manager Benchmarking Contribute to Ongoing Trend
CHICAGO, IL -- (Marketwired) -- 12/18/13 --
BMO Global Asset Management today released its latest "Investment Perspectives" white paper, Low-Volatility Equity Investing. This most recent edition addresses the history behind the low-volatility anomaly, how it is playing out in today's markets and the opportunities it provides for investors.
The paper shows that low-volatility stocks -- those with less price variability than the average stock in the market -- have outperformed other stocks; it highlights research showing that this anomaly has persisted over the past 90 years. The report also notes that this is one of the more surprising market anomalies uncovered to date.
"In theory, return is supposed to have a positive correlation to risk," said Ernesto Ramos, Head of Equities, BMO Asset Management U.S. "Higher-risk stocks are supposed to deliver higher returns, and lower-risk stocks are supposed to deliver lower returns. The low-volatility anomaly stands this sensible theory on its head. If this 90 year-old pattern were to continue, as we expect, the low-volatility anomaly may provide a nice opportunity for prudent investors to make outsized returns."
The white paper suggests a number of potential reasons behind the low-volatility anomaly and why it is likely to continue in the future:
- Money flowing into benchmark-driven strategies, such as index funds and ETFs, distorts the market and makes low-volatility stocks even more undervalued. This, in turn, increases their potential return.
- High-volatility stocks continue to be overbought, as investors continue to exhibit behavioral finance biases rooted in human psychology; these include the "lottery" effect and a preference for "glamour" stocks, among others.
- Structural conditions in the money management business, such as the option-like nature of compensation of equity managers, encourage them to avoid low-volatility stocks in favor of high-risk stocks. This may be enough of a bias to explain the low-volatility effect.
"Low-volatility investing represents a surprisingly significant potential opportunity for investors to earn excess returns over the benchmark," noted Mr. Ramos. "With that in mind, investors would be wise to consider an allocation to low-volatility equity strategies in their portfolios."
To access the full white paper report, visit www.bmogam.com/low-volatility.
About BMO Global Asset Management
BMO Global Asset Management is a global investment manager with more than $132 billion in assets under management, including discretionary and non-discretionary assets under management, and more than $162 billion in assets under administration as of October 31, 2013.
Our two multi-disciplined teams are based in Toronto and Chicago/Milwaukee, and our network of world-class boutique managers is strategically located across the globe. They include Monegy, Inc., Pyrford International Ltd., Lloyd George Management and Taplin, Canida & Habacht, LLC. BMO Global Asset Management delivers service excellence from offices throughout North America, and in London, Abu Dhabi, Mumbai, Beijing, Shanghai, Hong Kong, Melbourne and Sydney. Our approach has led us to be recognized by Pension & Investments as one of the world's largest 100 asset managers based on combined assets under management as of December 31, 2012.
We are a part of BMO Financial Group (NYSE:BMO), a fully diversified financial services organization with C$537 billion total assets and more than 45,500 employees as of October 31, 2013.
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Source: BMO Global Asset Management