VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
vwgrrc
Posts: 88
Joined: Mon Jul 18, 2016 5:35 pm

VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vwgrrc » Tue Dec 11, 2018 11:21 pm

I have been watching this fund for a while and started adding it to my portfolio since last year. It has been doing very well since inception. Now I'm seriously considering using this fund as my core equity holding instead of US/foreign (currently 64/36). I have read many discussions about this fund on the forum. Hope I'm not too crazy... Here are a few thoughts. :beer

Pros:
1) Low volatility with strong return compared to Total World Stock. For the same period, one would need an AA with 37% bond to achieve the same variance, with return much lowers than VMVFX
2) US/foreign ratio matches my target AA - 60/40 so no need to worry about rebalance
3) Not indexing but still relatively well-diversified and low cost
4) Foreign currency hedge

Cons/Things I'm not sure:
1) Even though I like the label "Minimum Volatility". This is still a young fund without much record in certain market conditions. How much the max downdraw would be in a market like 2008-09?
2) I fully understand the fund was designed to outperform the market in downturns and trails the market in bulls. But the return has been so good since inception that makes me wondering if valuation of these stocks are too high?
3) How much it will be affected by the interest rate?
4) How tax efficiency it would be to hold in taxable?

User avatar
hdas
Posts: 757
Joined: Thu Jun 11, 2015 8:24 am

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by hdas » Tue Dec 11, 2018 11:31 pm

I believe is apt. Some researcher I forgot his name said "Low Vol is the mother of all inefficiencies".
If you can live with the fact that you will under-perform in the up swings, go for it!
All these funds are showing at the top of best performing screens. I believe your post is motivated by this (recency bias lives!!).And I believe this is a contrarian signal.

If you are looking to just buy and hold. I think is fine. I prefer to switch or overweight between the market and low vol, depending on conditions.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

Blake7
Posts: 146
Joined: Fri Mar 30, 2018 2:52 pm
Location: USA

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by Blake7 » Tue Dec 11, 2018 11:33 pm

vwgrrc wrote:
Tue Dec 11, 2018 11:21 pm
4) How tax efficiency it would be to hold in taxable?
I personally wouldn’t want to hold this fund in a taxable account. The turnover rate is about 29%, vs. about 11% for the Total World stock.

User avatar
Starchild
Posts: 111
Joined: Fri Feb 09, 2018 9:01 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Starchild » Tue Dec 11, 2018 11:34 pm

I'm not sure of this fund specifically, but have a position in EFAV, iShares min vol ETF. Over the course of this year, it has fared better than total world, sustaining only half the losses of VEA (Van Dev. Markets). I did notice, however, when big jumps happen in VEA, you are not getting the same in EFAV. It seems more of a protective fund.

Topic Author
vwgrrc
Posts: 88
Joined: Mon Jul 18, 2016 5:35 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by vwgrrc » Tue Dec 11, 2018 11:45 pm

hdas wrote:
Tue Dec 11, 2018 11:31 pm
I prefer to switch or overweight between the market and low vol, depending on conditions.
That sounds like market timing. Personally I have not opposition. I guess you're overweighting low vol at this point? Curious how did that work for you over a long period of time.

User avatar
hdas
Posts: 757
Joined: Thu Jun 11, 2015 8:24 am

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by hdas » Tue Dec 11, 2018 11:57 pm

vwgrrc wrote:
Tue Dec 11, 2018 11:45 pm
hdas wrote:
Tue Dec 11, 2018 11:31 pm
I prefer to switch or overweight between the market and low vol, depending on conditions.
That sounds like market timing. Personally I have not opposition. I guess you're overweighting low vol at this point? Curious how did that work for you over a long period of time.
You got it backwards, the time to overweight low vol was when the market was high and low vol had lagged. Right now it’s the opposite.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

fennewaldaj
Posts: 560
Joined: Sun Oct 22, 2017 11:30 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by fennewaldaj » Wed Dec 12, 2018 12:47 am

Seems totally reasonable if low vol is what you are looking for.

typical.investor
Posts: 517
Joined: Mon Jun 11, 2018 3:17 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by typical.investor » Wed Dec 12, 2018 5:35 am

Current valuations of min/low vol are too expensive now I think. It doesn’t make sense to me.

Snowjob
Posts: 1559
Joined: Sun Jun 28, 2009 10:53 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Snowjob » Wed Dec 12, 2018 6:30 am

Perhaps go this way --(assuming you are looking at global exposures)

35% min vol / 35% world index / 30% Tips, Treasuries, CDs

Use the various periods of bullish and bearish sentiment allow for re-balancing opportunities between the equity styles ?

azanon
Posts: 2076
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by azanon » Wed Dec 12, 2018 8:35 am

typical.investor wrote:
Wed Dec 12, 2018 5:35 am
Current valuations of min/low vol are too expensive now I think. It doesn’t make sense to me.
I agree with this comment. This is the fund to buy if you're looking for yesterday's winning strategy.

Elysium
Posts: 1469
Joined: Mon Apr 02, 2007 6:22 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Elysium » Wed Dec 12, 2018 9:43 am

Sounds like performance chasing. I am tempted to buy as well, but then I realize I am performance chasing. If I wanted it why couldn't I buy it in 2017 when S&P 500 and EAFE were both giving above 20% and Min Vol was lagging.

This fund is a good core holding, but it will lag over long periods, and if you still wish to buy wait until major indexes start rallying again, that way you know you aren't chasing recent performance.

grog
Posts: 385
Joined: Sat Jul 20, 2013 1:09 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by grog » Wed Dec 12, 2018 10:05 am

vwgrrc wrote:
Tue Dec 11, 2018 11:21 pm
Cons/Things I'm not sure:
1) Even though I like the label "Minimum Volatility". This is still a young fund without much record in certain market conditions. How much the max downdraw would be in a market like 2008-09?
Based on the link below, most global min vol indexes were (would have been?) down around 30% in 2008. So marginally better than overall market. The strategy probably would have weathered the 2001 recession better.

https://www.bogleheads.org/wiki/Low_vol ... ex_returns

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by alex_686 » Wed Dec 12, 2018 10:15 am

Elysium wrote:
Wed Dec 12, 2018 9:43 am
This fund is a good core holding, but it will lag over long periods, and if you still wish to buy wait until major indexes start rallying again, that way you know you aren't chasing recent performance.
I will modestly take the other side.

First, my reading of the market, as well as many others - including Vangaurd - is that the next decade stock returns will be modest. I also believe that volatility will be high, partially this is due to VIX, partly due to the narrow spreads between long term treasuries and expected growth. If that is true, than a lower volatility fund should have lower volatility and a higher rebalancing bonus.

Second, I think expected inflation from the TIPS / Treasury spread is too low. So bonds carry a fair amount of risk. Equities are a good hedge against inflation. While not a complete answer, I think low volatility funds might be a partial answer here.

Topic Author
vwgrrc
Posts: 88
Joined: Mon Jul 18, 2016 5:35 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vwgrrc » Wed Dec 12, 2018 10:32 am

azanon wrote:
Wed Dec 12, 2018 8:35 am
typical.investor wrote:
Wed Dec 12, 2018 5:35 am
Current valuations of min/low vol are too expensive now I think. It doesn’t make sense to me.
I agree with this comment. This is the fund to buy if you're looking for yesterday's winning strategy.
This is definitely my biggest concern as well when looking at this fund. But one thing I don't understand - if these low vol stocks are gaining too much compared to what people think they should be gaining, shouldn't they be excluded from the portfolio of the fund?

typical.investor
Posts: 517
Joined: Mon Jun 11, 2018 3:17 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by typical.investor » Wed Dec 12, 2018 11:13 am

vwgrrc wrote:
Wed Dec 12, 2018 10:32 am
azanon wrote:
Wed Dec 12, 2018 8:35 am
typical.investor wrote:
Wed Dec 12, 2018 5:35 am
Current valuations of min/low vol are too expensive now I think. It doesn’t make sense to me.
I agree with this comment. This is the fund to buy if you're looking for yesterday's winning strategy.
This is definitely my biggest concern as well when looking at this fund. But one thing I don't understand - if these low vol stocks are gaining too much compared to what people think they should be gaining, shouldn't they be excluded from the portfolio of the fund?
No, it's not a value fund.
for the period from 1929 through 2010, while on average low-volatility strategies tend to have exposure to the value factor, that exposure is time-varying. The low-volatility factor spends about 62 percent of the time in a value regime and 38 percent of the time in a growth regime. The regime-shifting behavior impacts the performance of low-volatility strategies. When low-volatility stocks have value exposure, on average they outperformed the market by 2.0 percent. However, when low-volatility stocks have growth exposure, they have underperformed by 1.4 percent on average.
Low/Min vol looks expensive globally

https://interactive.researchaffiliates. ... ?region=US

(you have to select developed and emerging to see them - It's towards at the top towards the left)

garlandwhizzer
Posts: 2156
Joined: Fri Aug 06, 2010 3:42 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by garlandwhizzer » Wed Dec 12, 2018 11:15 am

This fund is expected to outperform the market in a bear market/correction and to underperform the market in a bull market. Whether or not to use it as a core holding depends somewhat on whether all the current possible risks (trade war, increasing rates, slowing economic worldwide growth, massive levels of debt, etc.) play out. If things work out well and the bull regains its momentum, low vol will likely underperform. If the opposite happens and the potential risks materialize in long term market struggles it will likely outperform and do so with less volatility. So in a sense a lot depends on your market future outlook. On the other hand increasing high quality bond allocation provides very effective volatility protection to a market or factor equity portfolio which is another way to handle volatility.

Garland Whizzer

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 11:19 am

I recently asked the board if I should go from 80/20 to 60/40 due to my decreased need to take risk.

What I will do instead is go 60/20/20 (Total Market/Min Vol/Bonds) to achieve a similar result.

User avatar
hdas
Posts: 757
Joined: Thu Jun 11, 2015 8:24 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by hdas » Wed Dec 12, 2018 11:21 am

HEDGEFUNDIE wrote:
Wed Dec 12, 2018 11:19 am
I recently asked the board if I should go from 80/20 to 60/40 due to my decreased need to take risk.

What I will do instead is go 60/20/20 (Total Market/Min Vol/Bonds) to achieve a similar result.
Which low vol fund did you choose and why?
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 11:22 am

hdas wrote:
Wed Dec 12, 2018 11:21 am
HEDGEFUNDIE wrote:
Wed Dec 12, 2018 11:19 am
I recently asked the board if I should go from 80/20 to 60/40 due to my decreased need to take risk.

What I will do instead is go 60/20/20 (Total Market/Min Vol/Bonds) to achieve a similar result.
Which low vol fund did you choose and why?
This one because of its global allocation and low fees.

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by alex_686 » Wed Dec 12, 2018 11:35 am

HEDGEFUNDIE wrote:
Wed Dec 12, 2018 11:19 am
I recently asked the board if I should go from 80/20 to 60/40 due to my decreased need to take risk.

What I will do instead is go 60/20/20 (Total Market/Min Vol/Bonds) to achieve a similar result.
Without running the numbers, by gut says that 60/20/20 carries about the same level as 75/25 allocation. I bit more equity risk, a bit less inflation risk.

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 11:39 am

Blake7 wrote:
Tue Dec 11, 2018 11:33 pm
vwgrrc wrote:
Tue Dec 11, 2018 11:21 pm
4) How tax efficiency it would be to hold in taxable?
I personally wouldn’t want to hold this fund in a taxable account. The turnover rate is about 29%, vs. about 11% for the Total World stock.
This fund has not distributed capital gains in past two years, and the 73% of the dividends are QDI taxed at long term cap gain rates. So I’d say it’s relatively tax efficient for a fund of its type.

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding bad idea?

Post by alex_686 » Wed Dec 12, 2018 11:42 am

HEDGEFUNDIE wrote:
Wed Dec 12, 2018 11:39 am
This fund has not distributed capital gains in past two years, and the 73% of the dividends are QDI taxed at long term cap gain rates. So I’d say it’s relatively tax efficient for a fund of its type.
Check the annual report to see how much in unrealized capital gains the fund has. I am going to guess that it is a new and growing fund. If so, then it would not be kicking out any capital gains. However once it's assets have topped out it will start kicking out capital gains. Maybe.

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 11:43 am

alex_686 wrote:
Wed Dec 12, 2018 11:35 am
HEDGEFUNDIE wrote:
Wed Dec 12, 2018 11:19 am
I recently asked the board if I should go from 80/20 to 60/40 due to my decreased need to take risk.

What I will do instead is go 60/20/20 (Total Market/Min Vol/Bonds) to achieve a similar result.
Without running the numbers, by gut says that 60/20/20 carries about the same level as 75/25 allocation. I bit more equity risk, a bit less inflation risk.
Yes I thought about doing 40/40/20 but didn’t want to put so many eggs in the min vol basket.

Elysium
Posts: 1469
Joined: Mon Apr 02, 2007 6:22 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Elysium » Wed Dec 12, 2018 12:00 pm

alex_686 wrote:
Wed Dec 12, 2018 10:15 am
Elysium wrote:
Wed Dec 12, 2018 9:43 am
This fund is a good core holding, but it will lag over long periods, and if you still wish to buy wait until major indexes start rallying again, that way you know you aren't chasing recent performance.
I will modestly take the other side.

First, my reading of the market, as well as many others - including Vangaurd - is that the next decade stock returns will be modest. I also believe that volatility will be high, partially this is due to VIX, partly due to the narrow spreads between long term treasuries and expected growth. If that is true, than a lower volatility fund should have lower volatility and a higher rebalancing bonus.

Second, I think expected inflation from the TIPS / Treasury spread is too low. So bonds carry a fair amount of risk. Equities are a good hedge against inflation. While not a complete answer, I think low volatility funds might be a partial answer here.
That is probably true logically. I am coming from behavioral aspects of it, such as how do I know I am not performance chasing if I decide to reallocate my money into Min Vol funds that happens to be doing well just recently but not last year. Will I abandon the strategy when it start lagging the market in a rally. Because we will surely see some strong market rallies even if end up in an overall low returns period for the decade, as we know the distributions don't happen evenly. I guess if we can objectively come to these conclusions without looking at past data it would make sense. Unfortunately we do look at past data quite a lot even here.

Valuethinker
Posts: 37254
Joined: Fri May 11, 2007 11:07 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Valuethinker » Wed Dec 12, 2018 12:14 pm

vwgrrc wrote:
Tue Dec 11, 2018 11:21 pm
I have been watching this fund for a while and started adding it to my portfolio since last year. It has been doing very well since inception. Now I'm seriously considering using this fund as my core equity holding instead of US/foreign (currently 64/36). I have read many discussions about this fund on the forum. Hope I'm not too crazy... Here are a few thoughts. :beer

Pros:
1) Low volatility with strong return compared to Total World Stock. For the same period, one would need an AA with 37% bond to achieve the same variance, with return much lowers than VMVFX
2) US/foreign ratio matches my target AA - 60/40 so no need to worry about rebalance
3) Not indexing but still relatively well-diversified and low cost
4) Foreign currency hedge

Cons/Things I'm not sure:
1) Even though I like the label "Minimum Volatility". This is still a young fund without much record in certain market conditions. How much the max downdraw would be in a market like 2008-09?
2) I fully understand the fund was designed to outperform the market in downturns and trails the market in bulls. But the return has been so good since inception that makes me wondering if valuation of these stocks are too high?
3) How much it will be affected by the interest rate?
4) How tax efficiency it would be to hold in taxable?
Research Associates had a recent piece on investing in a multi-factor world. It was linked to here and I urge you to read it.

The bottom line is that factor investing incurs long periods of underperformance, and that the returns are not normally distributed - the maximum drawdowns, and their length, are far greater than the normal distribution would predict.

Something like Value factor runs 12 years underperformance on a global basis. We are pretty close to that now so, fingers crossed, we are due a recovery ;-).

From memory low beta (low vol) runs way worse than that.

It seems that a lot of the performance of low vol was about these companies being anomalously cheap. That cheapness has more or less disappeared - something was discovered, published about, and the anomaly disappears. Those companies' merits are well appreciated by the market, now.

Be wary. The length of periods of underperformance, and the degree of the drawdown relative to the market, is terrifying.

I am reminded of the "Nifty Fifty" era. Taylor Larrimore has a good anecdote about that. The Nifty Fifty "one decision" stocks were in some ways the Low Volatility Factor of their day. And in quite a short space of time the stocks of Kodak, Polaroid, GE, Procter and Gamble, IBM etc fell by 50-60% as the market derated (cut the PE it applied to their future earnings) them.

Don't bet too much on this. I am 75% global, 25% global value (with Vanguard UK) - that's about as big a tilt risk as I am prepared to take.

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by alex_686 » Wed Dec 12, 2018 12:41 pm

Elysium wrote:
Wed Dec 12, 2018 12:00 pm
I am coming from behavioral aspects of it, such as how do I know I am not performance chasing if I decide to reallocate my money into Min Vol funds that happens to be doing well just recently but not last year.
So, how do you come up with your asset allocation?

For myself, it can not be "set it and forget it". Markets evolve over time, in particular its risk and return profile. See my earlier remarks on the market's expected change in return, volatility, and inflation. Plus my risk and return profile evolves over time.

For myself, I have enough math and theory that I can decently model out my goals and risk tolerance and build a portfolio from that. I also have enough self awareness that I know the limitations of my models. I tweak my IPS every year and overhaul it every 3. Low volatility has been bouncing in the back of my mind for a good 2 years before added a 10% allocation to US low volatility.

User avatar
vineviz
Posts: 2717
Joined: Tue May 15, 2018 1:55 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vineviz » Wed Dec 12, 2018 12:42 pm

Valuethinker wrote:
Wed Dec 12, 2018 12:14 pm
From memory low beta (low vol) runs way worse than that.
You are misremembering.

Also, VMVFX is buying low volatily stocks. It's a minimum volatility fund, and there's a difference.

Also, low volatility and low beta aren't the same thing. Market beta and realized volatility are mildly correlated, but they are two different risk factors despite that fact that some popular writers sometimes mistakenly treat them as the same.
Valuethinker wrote:
Wed Dec 12, 2018 12:14 pm
It seems that a lot of the performance of low vol was about these companies being anomalously cheap. That cheapness has more or less disappeared - something was discovered, published about, and the anomaly disappears. Those companies' merits are well appreciated by the market, now.
See above about VMVFX not being a low volatility factor fund.

Also, the low volatility factor hasn't disappeared although there is some evidence that it can be explained by controlling for size, value, and profitability.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

CULater
Posts: 1740
Joined: Sun Nov 13, 2016 10:59 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by CULater » Wed Dec 12, 2018 12:56 pm

VMNVX is the admiral shares version of VMNFX. I held it for a year or so. It hedges to the US dollar, so it removes currency from the equation. It was interesting to me that for a long time VMNVX had returns similar to USMV, which is a low-vol US market ETF. By comparing the two, you can get an idea of the role of low vol stocks globally vs. US-only since currency returns are taken out. Even minus currency, you would have been better off with USMV since US stocks have done better than foreign stocks. If you don't think the USD will continue to beat foreign currencies and do not wish to hedge, then ACWV is a low-vol global ETF that does not currency hedge and might be an alternative to consider. That's probably the way I'd go if I wanted to get back into a global low-vol fund, since I think Dalio is right that the USD is not going to do as well going forward. But if you don't want to speculate on currency base then I'd stick with VMNVX. Another factor to consider is that VMNVX is a little more tilted toward midcap, which probably provides more of a diversification benefit re: foreign exposure.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

btenny
Posts: 4777
Joined: Sun Oct 07, 2007 6:47 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by btenny » Wed Dec 12, 2018 12:58 pm

I think using this fund as a core holding is a very bad idea. It is a true active managed fund and not Boglehead at all. It is a quantitative fund going multiple directions at once. It does stock picking by trying to buy global low volatility stocks. It tries to manage country risk by doing currency hedging. And it does all this across several global markets. Talk about complexity no one can understand. Wow.... So far it has done great but it is only 4 or so years old. It has not lived through a bad market. Will it blow up a few times before it finds it way? Will it be closed or revised? Who knows. Maybe a small investment in this is OK but not a lot and make sure you know the risks. Just my opinion.

Ten years ago Vanguard opened three Managed Payout Funds. They were to deliver 3% or 5% or 7% depending on the fund you bought. Only one exists today and it only pays out 4% and part of that is return of capital. Very different than planned originally. As discussed in the article below these funds blew up in the bad markets. So they had to be changed and the distributions were reduced from the original plan? I see Managed Volatility a just another another side adventure into quant land.

https://investorplace.com/2010/02/vangu ... r-promise/

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by alex_686 » Wed Dec 12, 2018 1:06 pm

btenny wrote:
Wed Dec 12, 2018 12:58 pm
It is a quantitative fund going multiple directions at once. It does stock picking by trying to buy global low volatility stocks. It tries to manage country risk by doing currency hedging. And it does all this across several global markets. Talk about complexity no one can understand.
Currency hedging with "Zero Cost Collars" is dead simple and, as the name implies, zero cost. Well, not zero cost. You need a jr. analyst to run a report daily and maybe make a few forward trades. So maybe a bps or 2? So we can strike out the currency / country issue.

I would also argue that he quant strategy is not that complex, but I will admit that is a point of opinion - not fact.

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 1:13 pm

btenny wrote:
Wed Dec 12, 2018 12:58 pm
I think using this fund as a core holding is a very bad idea. It is a true active managed fund and not Boglehead at all. It is a quantitative fund going multiple directions at once. It does stock picking by trying to buy global low volatility stocks. It tries to manage country risk by doing currency hedging. And it does all this across several global markets. Talk about complexity no one can understand. Wow.... So far it has done great but it is only 4 or so years old. It has not lived through a bad market. Will it blow up a few times before it finds it way? Will it be closed or revised? Who knows. Maybe a small investment in this is OK but not a lot and make sure you know the risks. Just my opinion.

Ten years ago Vanguard opened three Managed Payout Funds. They were to deliver 3% or 5% or 7% depending on the fund you bought. Only one exists today and it only pays out 4% and part of that is return of capital. Very different than planned originally. As discussed in the article below these funds blew up in the bad markets. So they had to be changed and the distributions were reduced from the original plan? I see Managed Volatility a just another another side adventure into quant land.

https://investorplace.com/2010/02/vangu ... r-promise/
Here is what it comes down to: do you believe that these managers can predict which stocks will be less volatile than other stocks and less volatile as a group against the market?

I think the low vol / min vol factor is actually one of the easiest to understand and capture. Are you really going to tell me that the average utility stock cannot be predicted to be less volatile than the average biotech stock?

Also currency hedging is easy to understand, and will definitely lower portfolio volatility.

Who knows whether any of this will increase risk adjusted return vs the total market, but that’s not why I’m buying it. I’m buying it because I need to lower the volatility of my high stock allocation and still get a bit more return than bonds. For this purpose I think this fund will work perfectly.

User avatar
hdas
Posts: 757
Joined: Thu Jun 11, 2015 8:24 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by hdas » Wed Dec 12, 2018 2:31 pm

vineviz wrote:
Wed Dec 12, 2018 12:42 pm
Valuethinker wrote:
Wed Dec 12, 2018 12:14 pm
From memory low beta (low vol) runs way worse than that.
You are misremembering.

Also, VMVFX is buying low volatily stocks. It's a minimum volatility fund, and there's a difference.

Also, low volatility and low beta aren't the same thing. Market beta and realized volatility are mildly correlated, but they are two different risk factors despite that fact that some popular writers sometimes mistakenly treat them as the same.
Valuethinker wrote:
Wed Dec 12, 2018 12:14 pm
It seems that a lot of the performance of low vol was about these companies being anomalously cheap. That cheapness has more or less disappeared - something was discovered, published about, and the anomaly disappears. Those companies' merits are well appreciated by the market, now.
See above about VMVFX not being a low volatility factor fund.

Also, the low volatility factor hasn't disappeared although there is some evidence that it can be explained by controlling for size, value, and profitability.
Is there an important difference between VMFX and VFMV (besides the global hedged stocks vs only US difference)?
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

User avatar
vineviz
Posts: 2717
Joined: Tue May 15, 2018 1:55 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vineviz » Wed Dec 12, 2018 2:47 pm

hdas wrote:
Wed Dec 12, 2018 2:31 pm
Is there an important difference between VMFX and VFMV (besides the global hedged stocks vs only US difference)?
I'm not sure what would qualify as important, but they seem to me to be operated with similar strategies and factor exposures. One exception is that VFMV seems to have considerably more small cap exposure, which I think VMVFX abandoned because of capacity issues.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

btenny
Posts: 4777
Joined: Sun Oct 07, 2007 6:47 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by btenny » Wed Dec 12, 2018 2:49 pm

The Manage Volatility Fund blowing up is unlikely at you said. But not impossible and not even low probability IMO. And of more concern are major unplanned capital losses due to poor stock picking or single country events for lots of reasons. Things happen like earthquakes and riots and politics. And for those that think currency hedging is easy you just have not looked at history enough, study Argentina and Canada and Brexit. The issue is things change fast sometimes and hedges change sometimes with major blow ups. I know first hand from my past MegaCorp work. We did multi national contracting and currency hedging to let us manage US costs. We found you could lose all your profit in a few weeks. Timing was everything and impossible to manage. So we just insisted on bigger profits to protect us on foreign jobs which lost us a lots of contracts. With Vanguards insistence on low costs they cannot do expensive hedging. So they may lose a lot when things go sideways. Just my opinion....

Good Luck.

User avatar
Portfolio7
Posts: 490
Joined: Tue Aug 02, 2016 3:53 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Portfolio7 » Wed Dec 12, 2018 3:09 pm

I've held this fund for two years now, about 7% of my holdings.

I am not ready to trust it as a core holding. I want to see how it performs during a big draw down. Thus far, the performance appears to be very good (and I'm thinking about standard deviation when I say that.) Returns have of course been very good, and even Vanguard has noted that it's not reasonable to expect quite the same performance going forward.

That said, a 90/10 portfolio using this account has yielded almost 2% higher annual returns for roughly the same risk as a 60/40 portfolio. That's a very intriguing piece of data, so I have thought about doing that with one of my smaller accounts and letting it run for a while.
An investment in knowledge pays the best interest.

ThrustVectoring
Posts: 637
Joined: Wed Jul 12, 2017 2:51 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by ThrustVectoring » Wed Dec 12, 2018 3:42 pm

The concept of a "Bet Against Beta" factor implies that owning more of a low-volatility fund ought to out-perform at the same level of risk. The short explanation is that a lot of investors are unwilling or unable to use leverage, so they have to overbid on high risk / high reward assets in order to get their desired returns. The difficulty is that getting the overall exposure level right is more difficult, you're exposed to management risk and implementation risk, and the "correct" level of exposure for your risk tolerance is far more likely to mean that you need to use margin or other leverage to achieve your investing goals.

For what it's worth, though, this strategy of levering up your holdings in "boring" companies explains something like 2/3rds of Warren Buffet's alpha. Also this strategy is theoretically better to use in the bond market than the stock market, since you have more and better information in the bond market, along with cheaper leverage (via Treasury futures).

Overall, as long as you're taking an appropriate amount of risk, avoiding over-managing your portfolio, and using low-cost diversified funds, your investment strategy is likely to work. Pure indexing versus doing fancy stuff with factors isn't super important, and you can achieve your investment goals without weird poorly understood risks via indexing, so that's what I'm going with at the moment.
Current portfolio: 60% VTI / 40% VXUS

User avatar
Steadfast
Posts: 172
Joined: Wed Nov 06, 2013 3:44 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Steadfast » Wed Dec 12, 2018 3:51 pm

This fund is 29% of our equity allocation, and 17% of overall portfolio. Have held it for a few years now. Our only active fund, everything else is indexed.

The fund's stated objective includes this sentence:

...we caution against expecting any low or minimum volatility investment to outperform, or even match, the global equity market over the long term. It is reasonable for investors to expect, on average, for a minimum volatility fund to outperform the overall global market in sharp downturns and trail the market in strong bull markets.

If you are OK with the expectation of lower returns in exchange for the expectation of lower volatility, then the fund may work for you.

You'll have less money in the end. If you are thinking that somehow you'll have more money in the end, the fund's managers disagree.

I personally would not go all in on an actively managed, black-box quant fund like this. We use it because we have very high income and are more interested in reducing risk than maximizing returns.
We don't see things as they are, we see things as we are.

grog
Posts: 385
Joined: Sat Jul 20, 2013 1:09 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by grog » Wed Dec 12, 2018 4:45 pm

ThrustVectoring wrote:
Wed Dec 12, 2018 3:42 pm
The concept of a "Bet Against Beta" factor implies that owning more of a low-volatility fund ought to out-perform at the same level of risk. The short explanation is that a lot of investors are unwilling or unable to use leverage, so they have to overbid on high risk / high reward assets in order to get their desired returns. The difficulty is that getting the overall exposure level right is more difficult, you're exposed to management risk and implementation risk, and the "correct" level of exposure for your risk tolerance is far more likely to mean that you need to use margin or other leverage to achieve your investing goals.

For what it's worth, though, this strategy of levering up your holdings in "boring" companies explains something like 2/3rds of Warren Buffet's alpha. Also this strategy is theoretically better to use in the bond market than the stock market, since you have more and better information in the bond market, along with cheaper leverage (via Treasury futures).

Overall, as long as you're taking an appropriate amount of risk, avoiding over-managing your portfolio, and using low-cost diversified funds, your investment strategy is likely to work. Pure indexing versus doing fancy stuff with factors isn't super important, and you can achieve your investment goals without weird poorly understood risks via indexing, so that's what I'm going with at the moment.
Defensive stocks have done quite well over the decades. Depending on the time period, I believe the absolute returns are usually on par (and often better) than the broader market, and of course with lower volatility and drawdowns.

1) These stocks tend to be quasi-bond like and have some interest rate sensitivity. They've likely benefited from this term risk for the last couple of decades, but that might not be the case going forward.

2) Historically they've been more of a value play, but they no longer really are. This is despite being slow growing companies.

3) There isn't really a strong "story" for this anomaly. I think the one you suggest is the most likely. These are basically "anti-lottery" stocks. Volatile, high beta stocks have a certain lure because of the "jackpot" factor. The big payoff makes the individual stocks more appealing and people are willing to "overpay" for them. But a portfolio of high beta stocks isn't attractive since the diversification dilutes away a lot of the jackpot factor but you're still paying for it on each individual stock. With conservative stocks, it might be the opposite. Maybe. But I don't know that that will sustain continued excess returns in today's financial world.

4) There are several different ways to tilt to defensive equity. These "minimum volatility" funds are algorithm driven. The advantage of them is that they don't just pick low beta stocks and call it a day. The algorithms consider the historical covariances and total portfolio behavior (hedges). And this usually gives you a good sampling across sectors rather than just loading you up with utilities and other defensive sectors. But personally I have a distaste for this sort of data-mined stock selection based entirely on historical volatility data and a few constraints. I would prefer a system where companies are selected more on fundamentals and have the low volatility follow the fundamentals.

User avatar
Random Musings
Posts: 5339
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Random Musings » Wed Dec 12, 2018 5:18 pm

I will not use VMVFX as a "core" equity holding in my portfolio. I'm just going to keep it simple with equity funds (with not much tilt), bond funds, TIPs and CD's. I don't believe there are any magic elixirs out there when in comes to investing, perhaps a few high frequency trading groups that take advantage of their transactional speed. But the common investor has no access to those platforms. Anyway, once new investing concepts are "discovered" and sold as product, some or a good portion of that magic seems to disappear as it is a secret no more and more investors pile on to that idea.

Backtesting always works, but real life application always doesn't, especially when considering finite timeframes that us mortals have to deal with in the investing arena - or patience arena. How many people really can wait 5, 10 or up to 15 years for unfavorable tracking error to turn around and generate the expected returns that history has shown. IMHO, since there is a growth in these new types of products for the average investor now, I feel that many investors will start chasing different products and it may be a matter of luck if you choose the right time to chose the right idea.

If I want to reduce volatility in my portfolio, I will reduce my equity exposure. Although there are no guarantees even there.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by HEDGEFUNDIE » Wed Dec 12, 2018 5:27 pm

Random Musings wrote:
Wed Dec 12, 2018 5:18 pm
How many people really can wait 5, 10 or up to 15 years for unfavorable tracking error to turn around and generate the expected returns that history has shown.
What about “favorable” tracking error, as this fund has exhibited since inception?

I think there is a lazy tendency on this board to throw up one’s hands and say “nobody knows nuthin’” whenever one is confronted with a investment theory discussion. If you really believe that, then any portfolio or fund should be equivalent to any other.

If not, then you are implicitly saying you do believe in a few core “facts” about the market. Don’t judge the rest us in trying to discover a few more...
Last edited by HEDGEFUNDIE on Wed Dec 12, 2018 5:30 pm, edited 1 time in total.

ThrustVectoring
Posts: 637
Joined: Wed Jul 12, 2017 2:51 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by ThrustVectoring » Wed Dec 12, 2018 5:29 pm

grog wrote:
Wed Dec 12, 2018 4:45 pm
Defensive stocks have done quite well over the decades. Depending on the time period, I believe the absolute returns are usually on par (and often better) than the broader market, and of course with lower volatility and drawdowns.
The big outstanding question I have is how much I can trust that history to predict future risk. Like, my first instinct for how to use a less-risky asset with good returns is to add leverage until the risk level goes up to where I'm somewhat worried about it.
grog wrote:
Wed Dec 12, 2018 4:45 pm
1) These stocks tend to be quasi-bond like and have some interest rate sensitivity. They've likely benefited from this term risk for the last couple of decades, but that might not be the case going forward.
That's quite unfortunate, it means a diversified portfolio can't afford as much interest-rate risk. Maybe less so if you're naturally short interest rates - eg, through having an open mortgage. On the other hand, most portfolios aren't taking "enough" interest-rate risk in the first place.
grog wrote:
Wed Dec 12, 2018 4:45 pm
3) There isn't really a strong "story" for this anomaly. I think the one you suggest is the most likely. These are basically "anti-lottery" stocks. Volatile, high beta stocks have a certain lure because of the "jackpot" factor. The big payoff makes the individual stocks more appealing and people are willing to "overpay" for them. But a portfolio of high beta stocks isn't attractive since the diversification dilutes away a lot of the jackpot factor but you're still paying for it on each individual stock. With conservative stocks, it might be the opposite. Maybe. But I don't know that that will sustain continued excess returns in today's financial world.
If this factor currently exists and active investors manage to buy it until the gap closes, the price increase means you've made a winning trade. For factor investing, the bigger risk is that the factor is already bought out and is no longer present.
grog wrote:
Wed Dec 12, 2018 4:45 pm
4) There are several different ways to tilt to defensive equity. These "minimum volatility" funds are algorithm driven. The advantage of them is that they don't just pick low beta stocks and call it a day. The algorithms consider the historical covariances and total portfolio behavior (hedges). And this usually gives you a good sampling across sectors rather than just loading you up with utilities and other defensive sectors. But personally I have a distaste for this sort of data-mined stock selection based entirely on historical volatility data and a few constraints. I would prefer a system where companies are selected more on fundamentals and have the low volatility follow the fundamentals.
Overfitting the models and picking things without a good fundamental theory backing it is a real and present danger for those sorts of strategies. I'm also not sure how you'd want to think about measuring how "boring" a stock is other than looking at historical variance and co-variance with the overall market. It's also expensive and risky to manually evaluate large numbers of stocks by hand, so some kind of algorithmic screening makes a lot of practical sense for keeping expenses down.

My overall sentiment is that this could be worthwhile, but it's not convincing enough for me to actually pull the trigger and switch away from the bog-standard VTI/VXUS equity portfolio.
Current portfolio: 60% VTI / 40% VXUS

selters
Posts: 634
Joined: Thu Feb 27, 2014 9:26 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by selters » Wed Dec 12, 2018 6:37 pm

Random Musings wrote:
Wed Dec 12, 2018 5:18 pm
I will not use VMVFX as a "core" equity holding in my portfolio. I'm just going to keep it simple with equity funds (with not much tilt), bond funds, TIPs and CD's. I don't believe there are any magic elixirs out there when in comes to investing, perhaps a few high frequency trading groups that take advantage of their transactional speed. But the common investor has no access to those platforms. Anyway, once new investing concepts are "discovered" and sold as product, some or a good portion of that magic seems to disappear as it is a secret no more and more investors pile on to that idea.

Backtesting always works, but real life application always doesn't, especially when considering finite timeframes that us mortals have to deal with in the investing arena - or patience arena. How many people really can wait 5, 10 or up to 15 years for unfavorable tracking error to turn around and generate the expected returns that history has shown. IMHO, since there is a growth in these new types of products for the average investor now, I feel that many investors will start chasing different products and it may be a matter of luck if you choose the right time to chose the right idea.

If I want to reduce volatility in my portfolio, I will reduce my equity exposure. Although there are no guarantees even there.

RM
It's easy to say this for a US only investor, who has had very fine returns using only an S&P 500 index fund. But internationally straight index funds have had long stretches of zero returns with high volatility. A strong tilt towards minimum volatility (and perhaps some some small caps), would at least have given an investor something. I consider min vol just as much an insurance policy against a flat market as an attempt to beat the market.

Elysium
Posts: 1469
Joined: Mon Apr 02, 2007 6:22 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Elysium » Wed Dec 12, 2018 6:57 pm

One of the problems with lower volatility strategies could be that the equities that exhibited low volatility may not remain so as economic conditions change, and/or new money inflows cause valuations to rise. Here are two articles I found making case against them, first one talk about minimum volatility funds failing to protect in downturn and instead lose more money than traditional strategies, second one argues investors in passive funds do not need a lower volatility strategy.

https://www.ft.com/content/5999fbda-126 ... 320fc2a277
(sorry above link appears to be broken, try googling "Low volatility funds fail to protect investors" instead for this)

https://www.marketwatch.com/story/why-l ... 2015-02-02

I normally like to look under hood of the funds to see what business they are investing in, this will give me an idea beyond the numbers and stats. Looking at Vanguard Min Vol fund, several of the holdings appear to be defensive / boring stocks, but when you start looking at how some of these seemingly boring companies have performed in 2008 downturn you will notice that they are no immune from large drops and gains. For instance, one such example is a funeral services company called SCI, which is one of the top holdings in the fund. This stock went down 75% in 2008 and gained back about same in 2009, hardly exhibiting low volatility.

Now, we don't know if this stock would have made the pick into the MV fund in 2007, but the point is stocks that may be showing lower volatility in 2018 may display higher volatility in 2019. That said, you would have to trust the fund advisor is aware of all these issues and built the algorithm accordingly to select the stocks that meets the criteria and remove the ones that are no longer meeting it. Which will bring us to trading, turnover, liquidity, and associated costs. Here also, you would have to trust the advisor to have a strategy built in to the algorithm.

I guess we need more proof these type of funds can perform in all weather conditions as expected. Meaning, lower returns compared to the broad market as a whole with lower volatility, and higher returns than market in serious downturns. If we are going to get just lower returns overall and lower volatility, and sometimes market like volatility, then we are not getting expected results.

There are so many low volatility funds out there today, most of them started in the last five years, some last year / this year. What is the effect of all of these funds chasing too few low volatility equities. That also must be considered. Will the strategy still work as expected going forward, is another consideration.

Overall, I take back my opinion on whether this fund can be used as a core holding based on not having enough sample. I would like to see the strategy getting tested under various market conditions before making it a core part of the allocation.

User avatar
vineviz
Posts: 2717
Joined: Tue May 15, 2018 1:55 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vineviz » Wed Dec 12, 2018 9:04 pm

Elysium wrote:
Wed Dec 12, 2018 6:57 pm
One of the problems with lower volatility strategies could be that the equities that exhibited low volatility may not remain so as economic conditions change, and/or new money inflows cause valuations to rise. Here are two articles I found making case against them, first one talk about minimum volatility funds failing to protect in downturn and instead lose more money than traditional strategies, second one argues investors in passive funds do not need a lower volatility strategy.

https://www.ft.com/content/5999fbda-126 ... 320fc2a277
(sorry above link appears to be broken, try googling "Low volatility funds fail to protect investors" instead for this)

https://www.marketwatch.com/story/why-l ... 2015-02-02

I normally like to look under hood of the funds to see what business they are investing in, this will give me an idea beyond the numbers and stats. Looking at Vanguard Min Vol fund, several of the holdings appear to be defensive / boring stocks, but when you start looking at how some of these seemingly boring companies have performed in 2008 downturn you will notice that they are no immune from large drops and gains. For instance, one such example is a funeral services company called SCI, which is one of the top holdings in the fund. This stock went down 75% in 2008 and gained back about same in 2009, hardly exhibiting low volatility.

Now, we don't know if this stock would have made the pick into the MV fund in 2007, but the point is stocks that may be showing lower volatility in 2018 may display higher volatility in 2019. That said, you would have to trust the fund advisor is aware of all these issues and built the algorithm accordingly to select the stocks that meets the criteria and remove the ones that are no longer meeting it. Which will bring us to trading, turnover, liquidity, and associated costs. Here also, you would have to trust the advisor to have a strategy built in to the algorithm.

I guess we need more proof these type of funds can perform in all weather conditions as expected. Meaning, lower returns compared to the broad market as a whole with lower volatility, and higher returns than market in serious downturns. If we are going to get just lower returns overall and lower volatility, and sometimes market like volatility, then we are not getting expected results.

There are so many low volatility funds out there today, most of them started in the last five years, some last year / this year. What is the effect of all of these funds chasing too few low volatility equities. That also must be considered. Will the strategy still work as expected going forward, is another consideration.

Overall, I take back my opinion on whether this fund can be used as a core holding based on not having enough sample. I would like to see the strategy getting tested under various market conditions before making it a core part of the allocation.
The concept of minimum variance portfolios is not new: there is decades of research available to read for folks who are interested.

It’s not a panacea, of course, but it is a time tested method of portfolio construction that lowers volatility consistently enough to improve risk-adjusted returns pretty much always.

The 2008-2009 drawdowns were large (this is still an equity portfolio after all) but we’re 15% less than the broad market. That’s considerable.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Elysium
Posts: 1469
Joined: Mon Apr 02, 2007 6:22 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Elysium » Wed Dec 12, 2018 9:20 pm

vineviz wrote:
Wed Dec 12, 2018 9:04 pm
The concept of minimum variance portfolios is not new: there is decades of research available to read for folks who are interested.
Concept is not new, are the implementations new, or do they have decades of actual market practice? This is very important, when actual assets starts investing in the securities based on the research, that is when problems start.
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
It’s not a panacea, of course, but it is a time tested method of portfolio construction that lowers volatility consistently enough to improve risk-adjusted returns pretty much always.
Is it? where is the time tested actual implementation of the strategy going back decades? Most of the funds were created in last 5-6 years.
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
The 2008-2009 drawdowns were large (this is still an equity portfolio after all) but we’re 15% less than the broad market. That’s considerable.
So then what is the point, you could increase high quality bond allocation and get same result. If all your equity holdings are in MV funds then that is one thing, but if you are mixing them up then I don't see how reducing volatility for overall portfolio cannot be achieved by having high quality bonds.

I'm not against it, as opposed to some of the other alt strategies discussed here, and I do think it has merits, but need to see more time in the market from the current implementations that are all just 5-6 years old.

alex_686
Posts: 4290
Joined: Mon Feb 09, 2015 2:39 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by alex_686 » Wed Dec 12, 2018 9:30 pm

grog wrote:
Wed Dec 12, 2018 4:45 pm
Defensive stocks have done quite well over the decades.
So, let me counter. The story and the strategy behind low volatility and defensive stocks are the same. It is the path that is different. However,

Defensive stocks is based on narrative and industry. So, first, while common sense it is also subjective. I will point to Enron and WorldCom as exciting stocks that were in a sleepy industry.

Which takes us to the financials, which are bottom up, such as B/P and other ratios. The issue here is that these ratios have declining power. We can debate why if you want. In part this is because the ratios are being manipulated by management.

Volatility is based on what the company's stock price is actually doing, or top down. Harder to manipulate since whatever the company has done to manipulate the accounting numbers, the financial analyst have undone.

Each method has its strengths and weaknesses, but I think the top down quantitative method is the best one.

User avatar
hdas
Posts: 757
Joined: Thu Jun 11, 2015 8:24 am

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by hdas » Wed Dec 12, 2018 9:33 pm

Elysium wrote:
Wed Dec 12, 2018 9:20 pm
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
The concept of minimum variance portfolios is not new: there is decades of research available to read for folks who are interested.
Concept is not new, are the implementations new, or do they have decades of actual market practice? This is very important, when actual assets starts investing in the securities based on the research, that is when problems start.
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
It’s not a panacea, of course, but it is a time tested method of portfolio construction that lowers volatility consistently enough to improve risk-adjusted returns pretty much always.
Is it? where is the time tested actual implementation of the strategy going back decades? Most of the funds were created in last 5-6 years.
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
The 2008-2009 drawdowns were large (this is still an equity portfolio after all) but we’re 15% less than the broad market. That’s considerable.
So then what is the point, you could increase high quality bond allocation and get same result. If all your equity holdings are in MV funds then that is one thing, but if you are mixing them up then I don't see how reducing volatility for overall portfolio cannot be achieved by having high quality bonds.

I'm not against it, as opposed to some of the other alt strategies discussed here, and I do think it has merits, but need to see more time in the market from the current implementations that are all just 5-6 years old.
Check Robeco funds out of europe. I think they have been at it for a while. H
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

User avatar
vineviz
Posts: 2717
Joined: Tue May 15, 2018 1:55 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vineviz » Wed Dec 12, 2018 10:31 pm

Elysium wrote:
Wed Dec 12, 2018 9:20 pm
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
It’s not a panacea, of course, but it is a time tested method of portfolio construction that lowers volatility consistently enough to improve risk-adjusted returns pretty much always.
Is it? where is the time tested actual implementation of the strategy going back decades? Most of the funds were created in last 5-6 years.
There were retail funds using MVP at least by 1997, and institutional portfolios long before that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Elysium
Posts: 1469
Joined: Mon Apr 02, 2007 6:22 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by Elysium » Wed Dec 12, 2018 10:53 pm

vineviz wrote:
Wed Dec 12, 2018 10:31 pm
Elysium wrote:
Wed Dec 12, 2018 9:20 pm
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
It’s not a panacea, of course, but it is a time tested method of portfolio construction that lowers volatility consistently enough to improve risk-adjusted returns pretty much always.
Is it? where is the time tested actual implementation of the strategy going back decades? Most of the funds were created in last 5-6 years.
There were retail funds using MVP at least by 1997, and institutional portfolios long before that.
Such as? could we see some traceable information?

User avatar
vineviz
Posts: 2717
Joined: Tue May 15, 2018 1:55 pm

Re: VMVFX (Global Minimum Volatility) as core equity holding. Your opinion?

Post by vineviz » Thu Dec 13, 2018 12:14 am

Elysium wrote:
Wed Dec 12, 2018 9:20 pm
vineviz wrote:
Wed Dec 12, 2018 9:04 pm
The 2008-2009 drawdowns were large (this is still an equity portfolio after all) but we’re 15% less than the broad market. That’s considerable.
So then what is the point, you could increase high quality bond allocation and get same result. If all your equity holdings are in MV funds then that is one thing, but if you are mixing them up then I don't see how reducing volatility for overall portfolio cannot be achieved by having high quality bonds.
Well you don't get exactly the same result. Historically, combining a minimum variance equity fund with a bond fund has produced higher risk-adjusted returns than any combination of a traditional market cap weighted equity fund and the same bond fund. I'm not claiming this will ALWAYS be the result, but it typically holds true (in part because one of the theoretical advantages of minimum variance optimization over mean-variance optimization is lower estimation error).

Here's an illustration of the efficient frontiers. Notice that the frontier with MSCI USA Minimum Volatility (USD) Index dominates the frontier with the market cap US stock portfolio at all bond allocations from 0% to 100%.

Image

Here's what two portfolios looked like: a 60/40 combo of MSCI USA Minimum Volatility (USD) Index and Vanguard Total Bond Market Index Inv (VBMFX) compared with 60/40 combo MSCI USA Index and Vanguard Total Bond Market Index Inv (VBMFX). Notice that the minimum volatility portfolio produced lower volatility and higher risk-adjsuted return, exactly as you'd expect.

Image

It wasn't all wine and roses: 1994 through 1999 would likely have been tough time to stick with a strategy like this. High beta and high momentum were carrying the day for those six years, while low size and value factors (which are typically emphasized in a minimum variance approach) were pretty weak.

Still, I'd say that for many investors there is a definite qualitative advantage to a portfolio that whose worst year is a drop of 13.7% over a portfolio whose worst year is a drop of 22.03%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Post Reply