VMVFX & low volatility performance

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Portfolio7
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VMVFX & low volatility performance

Post by Portfolio7 » Mon Aug 27, 2018 11:00 pm

VMVFX is Vanguard's Global Minimum Volatility Fund, and intrigues me. I don't have time for a full workup and compare, but have pulled this together:

VMVFX is about 60% US 40% Foreign per the Vanguard composition detail.
It's a World small-midcap fund, per the morningstar category, but the style box puts it in large blend.
The more detailed box puts it right on the line between large cap and mid cap.
For it's relatively short life, the Standard Deviation has been about half of the benchmark, about 6% vs 12%.
Currently it's about 80% Equity, 20% Cash, per Morningstar. I'm not sure I understand that, I would think Equity should be 90-95%.

Theoretically, such a fund should perform pretty close to it's long term benchmark, lagging during good times and outperforming during the worse times. So far it seems to be doing that, but it hasn't been tested by a 30-40% drop in the indexes yet. Still, it seemed to perform well during the recent correction. Since 2014, compared to a slice and dice portfolio 60/40 (1) or a 3 fund portfolio 60/40 (2) using 40% spy and 20% VXUS, the std deviation of a 90/10 VMVFX/VBTLX (3) is comparable. (VBTLX=total bond). As you might expect with a 90/10 composition, the return from portfolio (3) is highest of the three portfolios, and with high return low risk, it has the best Sharpe and Sortino ratios. A US-only 60/40 two fund portfolio has an 8.02% return and 5.8% SD over the same period. Low vol is reportedly usually sensitive to rates, so maybe that provided a tailwind from 2014 to 2017.

Portfolio Initial Final CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
Portfolio 1 $10,000 $13,079 6.03% 6.09% 15.53% -1.62% -8.16% 0.93 1.51
Portfolio 2 $10,000 $13,382 6.56% 5.87% 15.59% -0.18% -6.18% 1.04 1.82
Portfolio 3 $10,000 $15,399 9.88% 5.66% 14.69% 4.63% -4.07% 1.62 3.06

These kind of numbers are very interesting in context of sequence of returns risk near retirement, not to mention everyday accumulation. This seems like 'have your cake and eat it too' territory... so now to poke holes. I'm not sure I can with this particular fund, but...

Other min vol / low vol funds don't seem to be quite as successful. Consider the SD of Large Cap US min Vol Funds vs Spy 1/16-3/18 which seem to be far less successful:
SPY 8.88
USMV 7.78
SPLV 8.19
AUENX 7.80
LGLV 8.36
The same seems to be true for smaller cap US funds like XMLV, XSLV, SMLV - they beat the benchmark Std Dev, but only marginally.
This level of performance seems unremarkable in general, and I'm not impressed with the data.


ACWV, the ishares large cap global min vol etf, seems to tread territory between the US MV funds and VMVFX, with a SD about 2/3 of benchmark since 2011. That seems like decent performance.

I may be missing big pieces of the puzzle, but I though I'd lay this out for consideration. I should disclose I own 7% VMVFX in my 401K, and some ACWV in my (small) IRAs. Questions I continue to think about:
Is Minimum Volatility the same thing as Low Volatility? I'm not sure if the Vanguard fund may have a different approach?
Or does Vanguard have some secret sauce?
Or is the outperformance Temporary?
Does the global coverage provide better scope for implementation?
If not, what explains the apparent relative outperformance of two Int'l funds relative to several Domestic funds? Or is that just chance?
An investment in knowledge pays the best interest.

garlandwhizzer
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Re: VMVFX & low volatility performance

Post by garlandwhizzer » Tue Aug 28, 2018 1:45 pm

I believe that VMVFX is a well managed active fund for those who wish a low cost global low volatility approach to investing. How it will perform in the future, like everything else in investing, is not accurately predictable beforehand except to say that it is expected be less volatile both on upside and downside market action. For those looking to have global equity exposure but de-risk it, it's definitely worth a look IMO. I do believe that active manager skill over a long time frame, although extremely rare, does exist (Primecap, Wellington). Low Vol is supposed to outperform long term but as its popularity increases that may not be true in the future. It's not a bad place to hang out if you believe that FANGS and LCG are due for serious setbacks in the near/intermediate term future.

Garland Whizzer

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Steadfast
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Re: VMVFX & low volatility performance

Post by Steadfast » Tue Aug 28, 2018 1:52 pm

I have watched this fund since its inception. What really appealed to me was prospectively was: (1) low cost, (2) global equity coverage, and (3) the potential diversification benefits.

Mostly, it does what it says. What it says is:

"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."

and importantly:

"...we caution against expecting any low or minimum volatility investment to outperform, or even match, the global equity market over the long term."

I'm totally OK with these as expectations and limitations, given our personal financial situation.

Today, about 25% of our equities are in this fund. The rest of equities are in low cost index funds, and we have bonds as well.

Looking at past performance, yeah, the sharpe and sortino ratios have been off the charts relative to reasonable benchmarks. That's not a reason to buy it in my opinion, but, there it is.
We don't see things as they are, we see things as we are.

hdas
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Re: VMVFX & low volatility performance

Post by hdas » Tue Aug 28, 2018 1:58 pm

This is a good resource to explore the low vol issue: https://www.amazon.com/Finding-Alpha-Se ... ding+alpha

Cheers :greedy
Stay the course and buy some more.

PlateVoltage
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Re: VMVFX & low volatility performance

Post by PlateVoltage » Tue Aug 28, 2018 2:21 pm

hdas wrote:
Tue Aug 28, 2018 1:58 pm
This is a good resource to explore the low vol issue: https://www.amazon.com/Finding-Alpha-Se ... ding+alpha

Cheers :greedy
The author makes this book freely available on his website:
http://falkenblog.blogspot.com/2016/08/ ... a-pdf.html

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sunnywindy
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Re: VMVFX & low volatility performance

Post by sunnywindy » Wed Dec 05, 2018 6:59 pm

Portfolio7 wrote:
Mon Aug 27, 2018 11:00 pm
I may be missing big pieces of the puzzle, but I thought I'd lay this out for consideration. I should disclose I own 7% VMVFX in my 401K, and some ACWV in my (small) IRAs. Questions I continue to think about:

1) Is Minimum Volatility the same thing as Low Volatility? I'm not sure if the Vanguard fund may have a different approach?
2) Or does Vanguard have some secret sauce?
3) Or is the outperformance Temporary?
4) Does the global coverage provide better scope for implementation?
5) If not, what explains the apparent relative outperformance of two Int'l funds relative to several Domestic funds? Or is that just chance?
I've been studying Vanguard Global Min Vol and iShares MSCI Global Min Vol (ACWV) the last few weeks and I, too, am very impressed with both of these funds and the whole Min Vol factor itself. Most likely I am going to buy one or the other at the beginning of next year (leaning to the Vanguard fund). (I already own iShares MSCI Emerging Markets Min Vol ETF (EEMV) and it has had very good performance over the years.)

1. Minimum Volatility or Low Volatility or Minimum Variance or Low Beta all mean the same thing. Some may quibble saying that there are some differences to each definition, but when these words are used in a fund's name or description, they are all describing a fund with the same desired outcome - low beta.

2. I read an interview with one of the Vanguard bigwigs (can't remember who) a while back and they said not to expect the same outperformance in the future as the fund is not designed for that. They were surprised it had done so well. Since passively indexed ACWV has also outperformed, I would say the outperformance has been luck. (However, I think there is a good chance both funds do outperform over 10+ years, except if there is a high inflation environment - that is min vol's Achilles Heel.)

3. However, I do think that the more volatile a market segment a min vol fund covers, the greater the potential for outperformance. That is why the emerging markets segment probably has the most upside potential using a min vol strategy. I would say long-term (greater than 10 years), a US min vol strategy has the least chance of outperforming.

4. The Vanguard fund is always partly to mostly hedged to the US dollar. This further reduces volatility, but it is unclear if it gives it a performance edge. Both funds have beaten the hedged and unhedged Global indexes.

5. If iShares is correct, the daily standard deviation of the market has been going up over the decades. See the bottom of page 2: https://www.ishares.com/us/literature/i ... -us-en.pdf I am only guessing, but I think that has to do with programmed buying & selling where financial computers buy and sell on their own and magnify the natural ups & downs of the market. If that is so, then this is good for min vol strategies!!
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Thesaints
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Re: VMVFX & low volatility performance

Post by Thesaints » Wed Dec 05, 2018 7:24 pm

Portfolio7 wrote:
Mon Aug 27, 2018 11:00 pm
Currently it's about 80% Equity, 20% Cash, per Morningstar. I'm not sure I understand that, I would think Equity should be 90-95%.
Not if they hedge. However 80% sounds suspiciously too low, also given the fact that in April it was close to 99%.

ThrustVectoring
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Re: VMVFX & low volatility performance

Post by ThrustVectoring » Wed Dec 05, 2018 8:04 pm

Portfolio7 wrote:
Mon Aug 27, 2018 11:00 pm
Or is the outperformance Temporary?
There's very good theoretical arguments to suggest that minimum volatility funds will outperform the stock market as a whole on a risk-adjusted basis. Specifically, the idea of "Bet Against Beta": high risk/reward assets are preferentially bought by investors seeking extra return while constrained by leverage, so lower risk/reward assets are cheap for the return they offer. Studies have shown this effect through multiple asset classes, and arguably the factor is more useful in the bond market, but it shows up in the stock market as well.

Anyhow, the "pure" BAB factor would target an overall beta of zero through a long/short strategy that owns lots of low-beta assets and less high-beta ones. I don't think there's a great way for individual investors to effectively do the short end of this trade in equities, though - and besides which, having exposure to stock beta is a great long-term investment, so there's no need to hedge that out.
Current portfolio: 60% VTI / 40% VXUS

hdas
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Re: VMVFX & low volatility performance

Post by hdas » Wed Dec 05, 2018 10:12 pm

ThrustVectoring wrote:
Wed Dec 05, 2018 8:04 pm
Portfolio7 wrote:
Mon Aug 27, 2018 11:00 pm
Or is the outperformance Temporary?
There's very good theoretical arguments to suggest that minimum volatility funds will outperform the stock market as a whole on a risk-adjusted basis. Specifically, the idea of "Bet Against Beta": high risk/reward assets are preferentially bought by investors seeking extra return while constrained by leverage, so lower risk/reward assets are cheap for the return they offer. Studies have shown this effect through multiple asset classes, and arguably the factor is more useful in the bond market, but it shows up in the stock market as well.

Anyhow, the "pure" BAB factor would target an overall beta of zero through a long/short strategy that owns lots of low-beta assets and less high-beta ones. I don't think there's a great way for individual investors to effectively do the short end of this trade in equities, though - and besides which, having exposure to stock beta is a great long-term investment, so there's no need to hedge that out.
The current drawdown will provide a good OOS test for the new breed of ETF's.....my money on USMV. Cheers. :greedy
Stay the course and buy some more.

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vineviz
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Re: VMVFX & low volatility performance

Post by vineviz » Thu Dec 06, 2018 12:02 am

sunnywindy wrote:
Wed Dec 05, 2018 6:59 pm
1. Minimum Volatility or Low Volatility or Minimum Variance or Low Beta all mean the same thing. Some may quibble saying that there are some differences to each definition, but when these words are used in a fund's name or description, they are all describing a fund with the same desired outcome - low beta.
I'm going to quibble, but only because I don't want investors buying something without knowing precisely what they are getting.

"Low Volatility" strategies are generally bottom-up strategies: funds with this label are holding some combination of stocks that individually exhibit the lowest volatility among whatever universe of stocks they belong to. These strategies are frequently designed to provide higher returns than the broad market.

"Minimum Variance" and "Minimum Volatility" strategies are generally top-down strategies: funds with these labels hold some combination of stocks that when combined are less volatile than the broad market.

Furthermore, different funds use different rules and constraints that can lead to very different kinds of performance. Some (like SPMV and LVUS) can end up with a beta that is HIGHER than the total stock market. Some (like OVLC and SPHD) can end up with very strong value tilts. Some (like SPLV and LGLV) end up with a heavy tilt towards quality companies.

I think the minimum volatility funds (e.g. iShares Edge MSCI Min Vol USA ETF (USMV) or Vanguard US Minimum Volatility ETF (VFMV)) are the better choices for most investors.


https://www.morningstar.com/videos/8922 ... funds.html
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

HEDGEFUNDIE
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Re: VMVFX & low volatility performance

Post by HEDGEFUNDIE » Thu Dec 06, 2018 12:07 am

vineviz wrote:
Thu Dec 06, 2018 12:02 am
sunnywindy wrote:
Wed Dec 05, 2018 6:59 pm
1. Minimum Volatility or Low Volatility or Minimum Variance or Low Beta all mean the same thing. Some may quibble saying that there are some differences to each definition, but when these words are used in a fund's name or description, they are all describing a fund with the same desired outcome - low beta.
I'm going to quibble, but only because I don't want investors buying something without knowing precisely what they are getting.

"Low Volatility" strategies are generally bottom-up strategies: funds with this label are holding some combination of stocks that individually exhibit the lowest volatility among whatever universe of stocks they belong to. These strategies are frequently designed to provide higher returns than the broad market.

"Minimum Variance" and "Minimum Volatility" strategies are generally top-down strategies: funds with these labels hold some combination of stocks that when combined are less volatile than the broad market.

Furthermore, different funds use different rules and constraints that can lead to very different kinds of performance. Some (like SPMV and LVUS) can end up with a beta that is HIGHER than the total stock market. Some (like OVLC and SPHD) can end up with very strong value tilts. Some (like SPLV and LGLV) end up with a heavy tilt towards quality companies.

I think the minimum volatility funds (e.g. iShares Edge MSCI Min Vol USA ETF (USMV) or Vanguard US Minimum Volatility ETF (VFMV)) are the better choices for most investors.


https://www.morningstar.com/videos/8922 ... funds.html
Vineviz, would you recommend a min vol fund as the core equity holding for a retiree? Perhaps to produce the same portfolio risk profile as a portfolio with a higher bond allocation?

For example, something like this:

https://www.portfoliovisualizer.com/bac ... tion3_2=50

Or this:

https://www.portfoliovisualizer.com/bac ... tion3_2=50

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vineviz
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Re: VMVFX & low volatility performance

Post by vineviz » Thu Dec 06, 2018 12:24 am

HEDGEFUNDIE wrote:
Thu Dec 06, 2018 12:07 am


Vineviz, would you recommend a min vol fund as the core equity holding for a retiree? Perhaps to produce the same portfolio risk profile as a portfolio with a higher bond allocation?

For example, something like this:

https://www.portfoliovisualizer.com/bac ... tion3_2=50

Or this:

https://www.portfoliovisualizer.com/bac ... tion3_2=50
Yes. I like ACWV (iShares Edge MSCI Min Vol Global ETF) as well.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: VMVFX & low volatility performance

Post by vineviz » Thu Dec 06, 2018 3:18 pm

vineviz wrote:
Thu Dec 06, 2018 12:02 am
Furthermore, different funds use different rules and constraints that can lead to very different kinds of performance. Some (like SPMV and LVUS) can end up with a beta that is HIGHER than the total stock market. Some (like OVLC and SPHD) can end up with very strong value tilts. Some (like SPLV and LGLV) end up with a heavy tilt towards quality companies.

I think the minimum volatility funds (e.g. iShares Edge MSCI Min Vol USA ETF (USMV) or Vanguard US Minimum Volatility ETF (VFMV)) are the better choices for most investors.


https://www.morningstar.com/videos/8922 ... funds.html
Here's a droll video today on international low volatility ETFs.

https://www.morningstar.com/videos/9036 ... equal.html
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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