Man Group: Low Volatility Portfolios Show Performance Dispersion
A new analysis by Man Group highlights the growing performance divergence among low volatility investment portfolios and the importance of implementation techniques.
Man Group PLC has released an analysis indicating that low volatility investment portfolios should not be treated as a homogenous category. The research suggests that the specific implementation techniques used can lead to significantly differentiated performance outcomes. The paper is intended for institutional and professional investors.
The analysis notes a recent resurgence in interest for low volatility strategies, driven by elevated market volatility and a renewed focus on downside risk mitigation. While these strategies experienced a brief period of underperformance following the onset of Covid-19, they have since seen a revival in both performance and investor inflows, underscoring the importance of understanding their underlying structure.
The firm's research points out that while the number of low volatility products surged after the global financial crisis, the pace of new fund launches has slowed in recent years. Despite this, the dispersion in returns among managers has steadily increased since 2017, reaching its highest level since the financial crisis in 2022. This widening gap presents challenges for allocators evaluating fund performance.
Man Group emphasizes that focusing solely on returns without considering risk characteristics can lead to biased conclusions when assessing low volatility portfolios. The analysis illustrates this by showing two managers with similar absolute returns but vastly different market risk exposures (betas). Risk-adjusted performance revealed a substantial outperformance for the manager with lower beta, highlighting the impact of portfolio construction.
Furthermore, the paper suggests that evaluating low volatility portfolios requires looking beyond short timeframes and considering their behavior across a full economic cycle. Understanding how these portfolios perform during different market environments, particularly during both risk-on rallies and risk-off downturns, provides crucial insights into their true capabilities and risk management effectiveness.