Low Volatility Funds - Should I sell them?

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Topic Author
Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Low Volatility Funds - Should I sell them?

Post by Erwin »

I have owned a well diversified, global, low volatility equity portfolio (about 30% of my total portfolio) for the past 3-4 years and it has done extremely well. Most recently, a number of articles, including a few from Swedroe, have warned investors that due to their high demand (they have become extremely popular), these funds have gone from value to growth. And that seems to be true based on their high P/Es.
So my question is whether it is time to reverse to standard cap weight funds. Any comments, specially from those that hold LV funds.
By the way I own iShares ACWV, EFAV, USMV, and EEMV.
Erwin
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djmbob
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Re: Low Volatility Funds - Should I sell them?

Post by djmbob »

Good question, Erwin. Having the same thoughts, so recency bias is probably setting in for me.
I hold Vanguard Global Minimum Volatility Fund Admiral Shares (VNMVX) in my taxable account.
Ray
Retired Military in Tulsa, 100% VA, MFJ, Age 66, Spouse 61, 2023 Effective Fed Tax Rate 12.17%, OK State 0%
Topic Author
Erwin
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Re: Low Volatility Funds - Should I sell them?

Post by Erwin »

Ray,
I have decided to wait a bit. I am following monthly the Sharpe ratios of ACWV vs VT to see if there is a deterioration.
Erwin
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njboater74
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Re: Low Volatility Funds - Should I sell them?

Post by njboater74 »

Erwin, what was your expectation when you first purchased them? Were you hoping for outperformance? Or for them to be more stable during a severe bear market? Or both?

I think that the outperformance of low volatility is in part based on the fact that it should be more stable during a bear market. That is, a fund like USMV will keep pace with the market, but probably underperform it by a bit, during bull markets.

In this sense, USMV and other low volatility funds haven't really been tested to that degree. Although in 08/15 and 01/16, they performed as expected, those were very modest downturns.

So do the high valuations and inflows into low volatility funds now make them more susceptible to full market volatility during downturns? That's the key question.

I don't have a good answer for you, just thinking aloud. But welcome the conversation among other folks who have gone with this strategy. My personal take is that you buy and hold with whatever strategy you go with. If you bought the funds to manage volatility, they should probably still be able to do that in the long term.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
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sunnywindy
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Re: Low Volatility Funds - Should I sell them?

Post by sunnywindy »

Ask yourself this question: Why did you buy into this strategy? For excess returns? Or the low volatility factor?

I own iShares Emerging Markets Minimum Volatility (EEMV)(about 6% of my portfolio) and I plan to hold on to it as I think the strategy is most beneficial during bear markets when stocks, and especially emerging markets, tend to tank. I think this is when this strategy will prove it's worth (we can hope and postulate, but really we never know). This particular ETF may or may not overvalued, but I plan to hold on to it.
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Topic Author
Erwin
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Re: Low Volatility Funds - Should I sell them?

Post by Erwin »

I am retired and when I decided to build my equity portfolio around them my thought was that I would not mind sacrificing a bit of return to get lower volatility, specially in bear markets where one needs it the most. I have to admit that I was shocked when I saw that they were returning more than the conventional standard cap weight funds.
But most recently I have read a few articles pointing that higher volatilities of these funds are possible going forward for a varity of reasons and decided that if that was the case then what was the point of holding them. In fact, and just by observation, recently I have sensed that these comments may be correct.
Erwin
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njboater74
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Re: Low Volatility Funds - Should I sell them?

Post by njboater74 »

I'm not sure that the recent underperformance of low volatility is due to high valuations, but probably more due to interest rates.

If you compare the performance of Vanguard Growth Index (VIGIX) vs Vanguard Value Index (VIVIX), VIGIX has outperformed VIVIX over the past 3 months. This isn't to say that Growth will outperform Value over any period of time. But simply that having Growth stocks doesn't mean underperformance, by itself.

The stocks held in low volatility funds (high dividend paying, defensive stocks) are more susceptible to interest rate risk than the rest of the market.

Check out the Fama-French Factor Regression of USMV over the past year from Portfolio Visualizer
https://goo.gl/fsmFDf

You'll see that USMV is exposed to a fair amount of term risk, comparable to Fidelity Intermediate Term Treasury Bond Index, which has a Duration of 6.55. It's also showing less exposure to the Quality factor than it has in the past. That term risk should help buoy the fund during a bear market, theoretically.

You expect a defensive portfolio to underperform during a strong bull market. You don't expect it to decline while the market is rising, or to underperform while the market is declining. Yet, its happening. It's a short period. I don't know if it's enough to be considered a trend.

Valuations do matter, but I'm keeping an eye on how interest rates impact it as well.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
Topic Author
Erwin
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Re: Low Volatility Funds - Should I sell them?

Post by Erwin »

Good point njboater74. Like I said, I will continue following my portfolio and give it enough time before deciding.
Erwin
stlutz
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Re: Low Volatility Funds - Should I sell them?

Post by stlutz »

I am retired and when I decided to build my equity portfolio around them my thought was that I would not mind sacrificing a bit of return to get lower volatility, specially in bear markets where one needs it the most.
If this is the reason you bought them, then there is no reason to make a change now. You can still expect lower volatility in a bear market and the likelihood that you'll sacrifice a little bit of return to get lower volatility.
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grap0013
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Re: Low Volatility Funds - Should I sell them?

Post by grap0013 »

Erwin wrote:I am retired and when I decided to build my equity portfolio around them my thought was that I would not mind sacrificing a bit of return to get lower volatility, specially in bear markets where one needs it the most. I have to admit that I was shocked when I saw that they were returning more than the conventional standard cap weight funds.
But most recently I have read a few articles pointing that higher volatilities of these funds are possible going forward for a varity of reasons and decided that if that was the case then what was the point of holding them. In fact, and just by observation, recently I have sensed that these comments may be correct.
It will be low volatility going forward either way. When low volatility acts more like value then you get above market returns and when they become more growth (like now) you get below market returns. I bolded your initial rationale for buying them and that has not changed. I vote stay the course!
There are no guarantees, only probabilities.
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grap0013
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Re: Low Volatility Funds - Should I sell them?

Post by grap0013 »

^^stultz beat me to it! :-)
There are no guarantees, only probabilities.
CP4641
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Re: Low Volatility Funds - Should I sell them?

Post by CP4641 »

For what it is worth Vanguard Managed Payout has lowered it's holding in global minimum volatility from 15% to about 7.5% since June.
larmewar
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Re: Low Volatility Funds - Should I sell them?

Post by larmewar »

The OP didn't say which global min volatility fund the investment was in. Foreign currency risk is hedged out of VG Global Min Volatility. So currency risk might be another consideration.

Lar
Topic Author
Erwin
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Re: Low Volatility Funds - Should I sell them?

Post by Erwin »

larmewar wrote:The OP didn't say which global min volatility fund the investment was in. Foreign currency risk is hedged out of VG Global Min Volatility. So currency risk might be another consideration.

Lar
I did in the last paragraph.
Erwin
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