How low volatility boosts compounded returns – case study emerging markets
The low volatility anomaly explains the advantages of low volatility investing. An additional benefit: The lower the volatility, the greater the compounding of portfolio returns. In their new white paper, Carsten Rother and Dr Xavier Gerard, CFA, find that using a low volatility approach in emerging markets can significantly reduce the risk of the market portfolio, making the compounding effect exceptionally powerful.
The performance of low volatility investing is driven by two effects. The first is the low volatility anomaly, which is the outperformance of low volatility stocks relative to their high volatility counterparts on a risk-adjusted basis. The second effect is that, all things being equal, the lower the volatility of an investment, the greater the compounding of portfolio returns.
While there is ample evidence that the low-volatility anomaly is widespread across markets, there has been less research on regional differences for the compounding effect. To fill this gap, we examine the performance of low volatility strategies globally, distinguishing between the low volatility anomaly and the compounding effect. We find that using a low volatility approach in emerging markets can meaningfully reduce the risk of the market portfolio making the compounding effect exceptionally powerful.
Read the full white paper:
