Last week I had the honor of participating in a panel on “Managing Money Globally With Low Volatility Investing” at the IMN Global Indexing and ETFs Conference in Arizona. I was told that the panel had the highest attendance of any breakout panel at the conference; 160 attendees packed the standing-room-only venue. Many attendees were very concerned about the fact that many stock indexes had two big drawdowns over the past 12 years, and that bond funds could be more risky in the future in light of the fact that interest rates are so low. Many attendees are very interested in strategies that can lower volatility, smooth our returns, and give investors more peace of mind.
Here are the people who participated on the panel —
Jonathan E Spinney, Portfolio Manager, NEW BRUNSWICK INVESTMENT MANAGEMENT CORPORATION
Matt Moran, Vice President, CHICAGO BOARD OPTIONS EXCHANGE
Craig Lazzara, Senior Director, Index Investment Strategy, S&P DOW JONES INDICES
Michael Pompian, Partner and Director of Private Wealth, MERCER
Peng Wang, Associate, Quantitative Strategies and Risk Management, THE UNIVERSITY OF VIRGINIA INVESTMENT MANAGEMENT COMPANY (UVIMCO)
Raman Aylur Subramanian, Executive Director – Index Research, MSCI, INC.
There was discussion of the ”low-volatility anomaly” — the fact that portfolios of low-volatility stocks often have produced higher risk-adjusted returns than portfolios with high-volatility stocks in many markets. It is considered an “anomaly” because it contradicts what the Capital Asset Pricing Model (CAPM) would predict about the relationship between risk and return.
CBOE’s NEW LOVOL INDEX
At the panel I introduced the new CBOE Low Volatility IndexSM (“LOVOLSM“), which is a 40% / 60% blend of the popular CBOE S&P 500 BuyWrite Index (BXMSM) and CBOE VIX Tail Hedge IndexSM (VXTHSM). The resulting portfolio overlays long VIX calls and short S&P 500 calls over an investment in S&P 500 stocks. www.cboe.com/LOVOL
Since the LOVOL’s base month of March 2006 (and through November 2012), the LOVOL has risen 38%, the S&P 500 is up 26%, and the MSCI EAFE is up 3%.
A key metric that many risk-averse investors analyze is the maximum drawdown or worst drawdown. A paper by Pertrac defines “maximum drawdown” as “the percent retrenchment from a fund’s peak value to the fund’s valley value.” Since 2006 the worst drawdowns (using month-end prices) for select indexes have been –
- Down 36.0% for LOVOL Index
- Down 51% for S&P 500 Index
- Down 56.7% for MSCI EAFE Index
We have received some good initial interest in the LOVOL Index. For more information on the LOVOL Index (including methodology and standard deviations) please visit www.cboe.com/LOVOL