The rush for low volatility assets is one of the most worrying areas of investment markets, according to panellists at IPE’s 360 conference.
Speaking this morning in London, Bob Swarup, principal at Camdor Global Advisors, said investor appetite for low volatility strategies “worries me more than most things”.
“Volatility consists of competing pools of emotions,” he said. “When volatility is extremely low, it means people are all facing the same way – it’s a huge herd mentality. That kind of structure is very hard to negotiate from a risk management point of view.”
He added there was a danger of investors focusing too much on value-at-risk measurements at the expense of “cash flow at risk”.
Ian McKnight, CIO of the UK’s Royal Mail Pension Plan, described low volatility equity strategies as a “pending disaster”.
He said: “You see a lot of crowded trades in so-called low volatility. If everybody buys something because it’s low volatility, and it steadily goes up and stays low volatility, what happens next? Is it overpriced? Then when it sells off it becomes not low volatility any more.”
Olivier Rousseau, executive director at French reserve fund FRR, highlighted Nordic equity markets as an example of an overbought low volatility area.
He said: “Nordic markets are quality markets where political risk has been seen as very low, and rightly so, but these are low volatility markets full of low volatility stocks, and investors have loved them. Now, they are a dangerous asset class in my opinion.”
However, the panellists agreed there were very few other asset classes offering real value. McKnight said Royal Mail had been selling down overvalued equities, but struggling to find opportunities in areas such as credit or high yield.
“You’ve got to look around for idiosyncratic opportunities depending on how illiquid you want to be,” the CIO said.
Rousseau said assets were in general very expensive, but euro-zone equities provided one window of opportunity.
“Some of the risks seen on the political side are clearly receding,” Rousseau said. “The reasonable gamble we make on euro-zone equities is simply that growth has been disappointing, and euro-zone companies have substantial operational gearing. If growth comes back to normal levels, it would have a very significant impact on company profitability. I don’t want to say it’s the buy of the century, but it seems quite reasonable to us.”