Low Volatility Strategies: Applying Quantitative Thinking To Build Better Portfolios

Transcription

1 Low Volatility Strategies: Applying Quantitative Thinking To Build Better Portfolios February 2014 Hillsdale Investment Management Harry Marmer, CFA, MBA Executive Vice-President, Institutional Investment Services / hmarmer@hillsdaleinv.com This presentation is not to be redistributed in whole or in part without prior written authorization. The information and material in this presentation are for informational purposes only. They are not intended as investment, financial or other advice. The information in this presentation is not an offer to sell or a solicitation to buy any security nor does it constitute an offer by Hillsdale Investment Management to provide its investment advisory services in any jurisdiction in which, or to any person to whom, it would not be permitted under applicable law. Further disclosures can be found at the end of the presentation.

2 Applying Quantitative Investment Management Thinking To Build Better Portfolios 1. Prepare A Hypothesis 2. Test Your Hypothesis 3. Implement and Continue to Test Your Hypothesis 2

3 1. The Hypothesis The Traditional Form of the Capital Asset Pricing Model States That The Expected Excess Return on a Security Is Equal To Its Level of Systematic Risk, Beta, Times the Expected Excess Return on the Market Portfolio. 1 3 See Page 42 in The Capital Asset Pricing Model: Some Empirical Tests, by Fisher Black, Michael Jensen and Myron Scholes, Studies in the Theory of Capital Markets (1972)

4 2. Test Your Hypothesis The Traditional Form of the Asset Pricing Model Is Not Consistent with the Data 1 The Tests Indicate that the Expected Excess Returns on High Beta Assets Are Lower Than the Model Suggests and that the Expected Excess Returns on Low-Beta Assets Are Higher Than the Model Suggests See Page 44 by Black, F., Jensen, M., and Myron Scholes. The Capital Asset Pricing Model: Some Empirical Tests. Studies in the Theory of Capital Markets (1972)

5 The Hypothesis For An Equity Minimum Risk Strategy Among The Many Candidates For The Greatest Anomaly In Finance, A Particularly Compelling One Is The Long-Term Success of Low- Volatility Stock Portfolios Which Offered An Enviable Combination of High Average Returns and Small Drawdowns Page 40 in Benchmarks As Limits To Arbitrage: Understanding The Low Volatility Anomaly, by Malcolm Baker, Brendan Bradley and Jeffrey Wurgler, Financial Analysts Journal, Volume 67, #1, 2011, pages

6 What Is An Equity Minimum Risk Strategy? An Equity Minimum Risk Strategy Is A Systematic And Quantitative Approach To Selecting Stocks That Relies Principally On A Risk Metric To Construct A Portfolio Carvalho, Raul Leote de, Xiao, Lu and Moulin, Pierre, Demystifying Equity Risk-Based Strategies: A Simple Alpha Plus Beta Description (September 13, 2011). The Journal of Portfolio Management.

7 3. Implement and Continue to Test Your Hypothesis Statistics Min Risk TSX Mean Median St. Dev High Low Simulated Canadian Equity Minimum Risk Strategy 180 Day Standard Deviation (%) (%) Median Stdev Stdev 20-1Stdev Stdev 12.7 Hillsdale Cdn Equity Cdn Min Min Risk Risk Cdn Cdn Min Equity Risk Min Median Risk MedianS&P/TSX Composite S&P/TSX Composite Index Index 7 Source: Hillsdale Investment Management.. Data is based on simulation prior to Oct See Disclosures. As of December 31, 2013

8 Evidence Of A Low Risk Effect Across the World In All Developed Equity Markets Developed Countries Performance Lowest Risk Decile Highest Risk Decile Sharpe Ratio is computed as the ratio of average return to volatility. 8 Source: Nardin L., and Robert A Haugen. Low Risk Stocks Outperform within All Observable Markets of the World. (April 2012). Available at SSRN: or

9 Evidence Of A Low Risk Effect Across All Emerging Equity Markets Emerging Markets Performance Lowest Risk Decile Highest Risk Decile Sharpe Ratio is computed as the ratio of average return to volatility. 9 Source: Nardin L., and Robert A Haugen. Low Risk Stocks Outperform within All Observable Markets of the World. (April 2012). Available at SSRN: or

10 When Do Low Volatility Strategies On A Return To Risk Ratio Basis Work Relative To Market Cap Indices? A Variety of Reasons Including: Embedded Factor Bets Behavioural Finance Rationales Benchmark Standards 10

11 Bio Harry Marmer, BBA, MBA, CFA, Executive Vice President and Partner joined Hillsdale Investment Management in Prior to joining Hillsdale, Mr. Marmer led the Canadian institutional investment business of Franklin Templeton Investments and before that the institutional business of the Russell Investment Group. He was also a principal and co-head of Mercer's Canadian Investment Consulting Practice. Mr. Marmer is a frequent conference speaker and has authored more than 47 articles. His book, Perspectives in Investment Management, was published in September He has served on a number of professional and industry boards and was past president of the Toronto CFA Society. Mr. Marmer received the Volunteer of Distinction Award from the Toronto CFA Society and was awarded the Society s Research Award. He has an MBA and a BBA, finance and investments, York University. 11

12 Disclosures All references to a Low Volatility Strategy (Strategies) refer to Hillsdale s Canadian Equity Minimum Risk Strategy. Performance and other data in this presentation are shown for illustrative purposes only. Past performance is not indicative of future performance. The simulated returns are based on a quantitative simulation where stocks are selected based on a multifactor ranking system. The simulated returns are shown gross of fees and are calculated in Canadian dollars unless otherwise stated. No representations are being made that the investment process will achieve similar returns on a going forward basis. Investors should not take this example or the data included in the presentation as an indication, assurance, estimate or forecast of future results. The actual performance returns may differ materially from the returns shown for reasons including, but not limited to, investment restrictions and guidelines, fees and other expenses, cash holdings, timing of trade execution and fluctuations in the market. 12