Acadian Asset Management senior vice president, portfolio manager and researcher Ryan Taliaferro said while it makes more sense for higher volatility stocks to earn higher returns on average and low volatility stocks to earn lower returns, this is not the case.
“This is the very great surprise; it turns out there doesn’t seem to be any compensation for risk at all in equity markets,” said Mr Taliaferro.
“They all seem over time to earn the same average return.”
Mr Taliaferro said while this is surprising it also provides investors with an opportunity.
“If you’re not going to be paid for risk, why expose yourself to it?” he said.
Mr Taliaferro referred to a study conducted by Acadian Asset Management, where the asset manager divided the “investable universe in the US and divided it into five categories based on the volatility of the stocks”.
The study looked at equities over a 50-year period, according to Acadian Asset Management.
Mr Taliaferro said an investor purchasing relatively risky stocks from category four would have earned 10 per cent over this half century; however, an investor purchasing slightly less risky stocks from category three would have also earned this.
Even the lowest volatility stocks in category one achieved around the same average returns as the higher volatility stocks, said Mr Taliaferro.
Mr Taliaferro said by building a portfolio of stocks with lower volatility you would receive around the same levels of returns on average but with “lower ups and downs” and “lower drawdowns”.
He also noted the additional benefit of compounding.
According to Acadian, an asset generating a steady five per cent will have better compounding compared to a stock alternating between four and six per cent, despite the average still being five.
Mr Taliaferro said this has formed the underlying thesis for Acadian’s low volatility strategies, such as Acadian global Managed volatility equity fund.
Colonial First State Investments, who distributes Acadian’s product on its platform First Wrap, said there has been considerable interest in these strategies from institutional investors.
Colonial First State also said there has been growing interest in the retail space, particularly among advisers with clients approaching or in retirement looking to reduce the sequencing or drawdown risk in their clients’ portfolios.
