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Asset Management

Does low volatility anomaly work in funds?

T. Fuertes



After many years there are many evidences that the low volatility anomaly works in stock markets.  We have also mentioned this topic a long time ago to analysis the costs of it. This anomaly says stocks with less price variability deliver higher returns, contrary to everyone’s belief, which expects that return is supposed to be related to risk.

In this post, we want to play and check what would happen if we tried to apply this anomaly to funds market. As you know the funds return depends on how accurate the managers are by taking profit from their strategies. Therefore, there are several variables that take part in funds world. However, it is interesting to analyse the conclusions of this experiment.

First attempt

If we follow the original theory, this takes place in stock market. Then, we use a set of equity funds and select 20 funds that are the least volatile ones every month, by allocating equal weights.

Investment process of equity portfolio

Investment process of equity portfolio

The result of it is quite encouraging because it outperforms the benchmark (MSCI World). The uptrends are stronger although the downtrends are also big. However, in the end, the performance is acceptable.

Results of equity portfolio

Results of equity portfolio

Second atempt

Now, let’s try with the whole universe, could it keep the previous results? In this case, we use a representative set of both types of funds equity and fixed income.

Investment process of 60-40 portfolio
Investment process of 60-40 portfolio

In this case, the portfolio does not outperform the benchmark systematically but the downtrends are smoother than those of the equity portfolio.

Cumulative returns of 60-40 portfolio.
Results of 60-40 portfolio

Here there is an image which shows the selected universe with the least volatility:

Return & volatility of selected universe of 60-40 portfolio
Return & volatility of selected universe of 60-40 portfolio


It seems that low volatility theory doesn’t work in fund markets as well as in stock markets. However, there is a sign of the fact that it can be useable in some period of uptrends.

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3 years ago

Are you adjusting your universe for survivorship bias? i.e. using the universe as it was available on the inception of your backtest rather than the universe as it is available today?