The low volatility phenomenon (and what it means for your portfolios)

Ally Selby: Hello, and welcome to Livewire's The Pitch. I'm Ally Selby, and today we're joined by State Street Global Advisors' Bruce Apted for a deep dive into the low-volatility phenomenon. We're going to learn what that even is, as well as what it means for your portfolios. Thanks so much for joining us today, Bruce.
Bruce Apted: It's an interesting one. At the highest level, it's really an observation that, historically, you get a higher return, but you also get this lower volatility profile. It's a more defensive equity profile. So, at the highest level that is what it is, and there are obviously layers to that. And I think one of the things to think about is, why would that be the case? Why would you get out-performance from low volatility? It might be a bit counterintuitive, perhaps. And really, where that comes from is the strength of having more defensive positions in your portfolio. They lose less in down markets and when markets are volatile, and so that's where they get their out-performance from.
Bruce Apted: There are ones in the market and there are also ones outside of the market that I think a lot of people can relate to. I think most of us have seen super lottos and very large lottery opportunities, and many of our friends have bought lottery tickets. It's something that is documented in literature as well. It's known as the lottery effect. And what it is, is that investors or individuals are quite interested in very large payoffs. They're kind of sexy. They're things that people are attracted to. But there also is a super-low probability of them actually ever getting any return from it. Bruce Apted: We see lots of different themes going on in markets, and I think it depends on how you classify some of those things around growth and high beta. I would actually try and differentiate a little bit between high-volatility stocks and growth stocks. There are some growth stocks recently that have gone up, and they've gone up for good reason. But there have also been some interesting observations - we've just seen high-volatility stocks being in favour, and low-volatility stocks being out of favour. Normally what you need is some sort of changing risk preferences for investors to start focusing on some of the risks in the economy, and some of the risks in markets, to start gravitating towards some of those lower beta stocks and rotating out of some of those higher beta stocks that don't have the strong fundamentals.
Bruce Apted: So the obvious ones are things where they're very robust to changes in economic conditions. So what would that be? Healthcare is a classic example. If we have issues with our health, it doesn't matter how expensive that is, we're going to spend that money on that health and that will be supportive of those businesses regardless of the economic activity.  

I think the other obvious one that everyone can relate to is staples. We all buy food and we buy our alcohol and different things like that. So those things are purchased regardless of the economic environment, and so they're much more stable and much less sensitive to changes in economic conditions. And on the flip side, you've got some of those other types of businesses like metals and mining companies that are very leveraged to global growth and positive changes in those conditions. So they're the more cyclical ones that tend to be a bit more volatile.

Ally Selby: Okay. Well, thank you so much for your time today, Bruce. It was a pleasure to have you on The Pitch.

Bruce Apted: Thanks, Ally. Great to be here.

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