Last October, the Monegasque Association of Financial Activities organised a conference on individual discretionary management. Speakers included Mr. Vincent Ollivier, Fund Manager with GFG Monaco SAM, who talked about "Equity low volatility strategies". We questioned him on this subject.
As a fund manager, and in an unstable environment, should you stop investing in equity?
In 2018, we experienced a complicated and clearly unexpected situation: fears of a global economy slowdown, geopolitical and economic tensions, inflationary fears. In this context of uncertainty, the US central bank nevertheless decided to raise its key lending rates four times in all. In fact, 90% of asset classes underperformed ‘cash’ solutions – a phenomenon not seen since 1970.
Overall, 2018 was marked by a strong return of volatility, following a very calm 2017.
We had the impression that the market structure was changing and that the bullish cycle we have experienced for several years now was very clearly running out of steam.
In this tense context it is reasonable to ask oneself whether it is worth continuing to invest in equity. Our answer is "yes". However, we believe it is essential to carefully select investment factors that are able to outperform the market in a changing environment.
What are those investment factors?
The most common investment factors are the following:
- Value - which consists in selecting shares that are low-cost compared to their generated profits
- Momentum - which consists in selecting shares that have a positive momentum (or trend)
- Low Volatility - which consists in selecting the least risky or least volatile shares
- Growth - which consists in selecting shares of high growth companies, often with double-digit growth
- Dividend - which consists in selecting shares whose dividends are stable and high
- Quality - which consists in selecting shares of companies whose balance sheet is healthy, with a low debt ratio and stable earnings
- Size - which consists in preferring small or mid capitalisation securities over large-cap ones
In the current market, experiencing an economic downturn, does the ‘Low Volatility’ criterion seem priority to you in investment choices?
Absolutely, historically speaking ‘Low Volatility’ strategies are some of the highest performing strategies. Indeed, they allow exposure to bullish phases while reducing capital losses in the event of bearish phases. This type of strategy has significantly outperformed the market in 2018 and allowed ongoing exposure to equity in an uncertain environment.
How have you built your ‘Low Volatility’ strategy?
We wanted to create a systematic model, completely automated and rebalanced monthly.
First we defined an investment universe comprising the 600 largest capitalisations in Europe: Eurostoxx 600 securities.
Then we reduced this investment universe from 600 to around 100 securities using a ‘volatility filter’. This step is really paramount, and we worked hard to obtain a reliable tool that allows us to predict share volatility over the next month with a high success rate.
Once our 100 securities are identified, we weight them using our ‘Best in Class’ parameter. This tool optimises the strategy’s return by slightly overweighting shares enjoying better momentums and underweighting shares with worse momentums. This enables us to have an effective strategy in bullish phases too. ‘Low volatility’ solutions are in fact often criticised for underperforming too much in bullish phases.
We first developed this strategy by means of an indexed format from January 2016, and by means of a certificate from the end of 2016.
We were very pleased with our performance in 2017 (+13.9% vs. +10.6% for our investment universe) in an environment that generally saw an underperformance of low volatility strategies.
As for 2018, our strategy has behaved as we expected, strongly outperforming the market in the months of sharp fall (February, March, August, October and December). This enabled us to finish by halving the heavy loss of European equity: -5.41% vs. -10.77%.
