Low-volatility strategies are gaining a lot of interest — but not much money — from institutional investors.
Late last year, several money managers reported increased enthusiasm for the strategies but they still have not realized any meaningful inflows. These equity strategies invest in less risky stocks while seeking to outperform popular benchmarks, such as the Russell 3000 or MSCI World indexes.Some attribute the lack of movement to unwillingness by investors to try something different and relatively untested, especially in the current economic climate.
Ric Thomas, senior managing director and head of alternative investments at State Street Global Advisors, Boston, said that although he has frequently talked with clients about the strategies, they “just aren't moving a lot of money around.”
“Pension funds are probably sitting on their hands right now trying to figure out what to do,” he said.
State Street has $7 million in assets under management for low-volatility strategies mostly from institutional investors.
The strategies turn on its head the conventional wisdom that the higher the risk, the higher the return. Low-volatility strategy managers, who tend to favor value stocks over growth stocks, argue they can deliver equity returns but with less risk.
“Low-volatility beta stocks give you equity premium without downside risk,” Mr. Thomas said.
Officials at AXA Rosenberg Group LLC, Orinda, Calif. decided to market their low-volatility strategy to a larger audience this year; to date, the firm had made the product available to only one client since 2004. So far, the company has not raised additional money, although it recently completed some requests for proposals, according to William Ricks, AXA Rosenberg's Americas chief investment officer.
AXA Rosenberg has about $5.5 billion in assets under management for its low-volatility strategy.
Mr. Ricks said the current lack of investment in low-volatility strategies may have to do with timing.
“I think with perfect foresight we would have launched last year,” he said. “Now the market is looking for a rebound.”
Low-volatility strategies tend not to perform as well during rebounds, managers said. But many of them argue that investors who put money in this approach should not be timing the market anyway, and the strategies are meant to perform well over the long haul.
Mr. Ricks said the strategies appeal to institutional investors who have a value orientation, and who realize that the markets are cyclical and can carried away, like during the technology bubble.
Those who might shy away from the strategies are investors who prefer benchmarks against which to weigh performance.
“To have a strategy that doesn't have that benchmark awareness won't appeal to an investor or consultant that's sliced up the world” that way, he said.
Churchill Franklin, executive vice president and chief operating officer at Acadian Asset Management LLC, Boston, agrees the low-volatility strategy “doesn't fit into a box.”
“This strategy ignores the benchmark so it could be 25% ahead when the benchmark is collapsing and 25% behind when benchmark is soaring,” he said.
Acadian manages $240 million in low-volatility strategies. Like other money managers, Mr. Franklin said he has seen no new net inflows from the strategies but has heard a lot of discussion and expects things to look up soon.
