Low-Volatility Investing Finds Favour in Asia

Once only popular with the largest European and North American investors, low-volatility investing has spread to more corners of the world.

(September 11, 2012) — Low-volatility investment has found a burgeoning new audience in Asia, as institutional investors embrace strategic asset allocation and begin to include the approach in their portfolios. 

Pension funds and sovereign wealth funds (SWF) in Japan, China, Thailand, and Singapore are starting to show interest in products and strategies offering exposure to traditional asset classes through a low-volatility lens, according to David Blitz, head of Quantitative Equities Research at European asset manager Robeco. Neighbouring Australia has also shown interest in the approach.

“We have seen a lot of demand in Asia for low volatility investment strategies and we were a little surprised as we thought it was going to be a tough market to crack,” said Blitz. 

He said due to the difference in views on investment time horizons to European investors, many providers thought the strategy would not be popular. 

“It makes sense for European investors, such as pension funds that have seen their funding levels plummet, to be interested in low-volatility investing. But large SWFs in Asia, for example, do not have [visible] liabilities to meet – it is a sign that these markets are maturing.” 

Blitz said many large investors across Asia had begun structure their portfolio using a “factor” approach – using factor premiums rather than traditional asset classes as a starting point – which broadened their opportunity set. 

“If you can offer something that has lower risk with similar return, there is a strong business case for taking it,” said Blitz. 

He said there had also been a surge in the number of low-volatility strategies on offer, including a number of low-volatility ETFs. Moreover, the low-volatility approach is now also being applied beyond just equities. Robeco, for example, recently introduced a low-volatility credits strategy. 

However, he said the growth in the number of providers that had begun to offer these products was potentially unsustainable. Companies with little background or dedicated expertise in the strategy could produce disappointing results. 

“There may be some overcrowding – I would not be surprised if there is a shake out a couple of years down the road and we will have to see who remains,” he said.