Equities Low Volatility during the COVID-19 crisis

23.06.2020

Our approach to investing in Low Volatility Equities

The philosophy behind Equities Low Volatility is that the companies with low volatility - measured by exchange rate fluctuations - provides a better risk-adjusted return in the long term than investing in companies with high volatility. This is usually referred to as the Low Vol. anomaly. Numerous researchers have tried to explain and test the Low Vol. anomaly, and the conclusions are that investors are not rewarded for taking more risk.

In our fund - Equities Low Volatility - we seek to use this Low Vol. anomaly as much as possible, deliberately divesting half of the market with the highest volatility. Thus, we invest only one-half of the market with the lowest volatility, and the majority of the investments are in companies that are in the lowest quantile of the market in terms of volatility.

In addition to the company with low volatility, we seek to combine the low volatility with quality, seeking companies with high and stable margins, and with a business model that is reasonably protected. We are look for companies with either Narrow or Wide MOAT.

We have run this process since the foundation of the fund in 2013, and the process has worked extremely well. Furthermore, it is our philosophy to have a portfolio of around 90 companies, with a broad exposure to regions and sectors, thereby ensuring optimal diversification and protection of invested capital.

 

The COVID-19 crisis

The COVID-19 crisis has changed the way in which the investment community perceive risk in many areas. We have experienced that equities estimated to perform well in an economic recession due to their defensive business model, actually did not maintain their defensive characteristics. The usual desired stability have been subverted in such an unknown phenomenon as a global pandemic, which shuts down all air-traffic, department stores and suddenly makes IT equities the safest investment in the world.

The global equity markets have been just as confused as the politicians of the world in their actions during this crisis. In the period with the largest fall in prices, 19 February 2020 to 23 March 2020, the fund managed better than the global equity market (MSCI AC World). We had initially estimated that the fund would have performed even better relative to the period, but the crisis made IT stocks, which the fund is underweight in, a reasonable safe investment. Thus, this better performance from IT stocks has relatively diminished our outperformance. Meanwhile real estate stocks with a stable business model, which is overweight in the fund, fell more than expected. The overweight of the fund in stable sectors such as consumer staples (food producers) and the communication sector (telecommunications companies) were instrumental in protecting the fund from the same negative returns experienced by the global equity market.

The significant monetary and fiscal easing caused the equity market to rise sharply at the end of March. Under these sharp increases, the fund’s low risk and beta below one will result in lower returns than the global equity market.

During the COVID-19 crisis we made some adjustments to the portfolio. These adjustments can be divided into two groups. The first group consists of companies sold, because the companies are, or can be, directly affected by the crisis. Examples of such transactions is our sell of Klepierre, a real estate company that manages department stores, Welltower, a real estate rental company in the US, and Disney, which had to close their theme parks. The second group of redevelopment is increased exposure to utilities, through the acquisition of National Grid and Con. Edison. As well as increased exposure to healthcare and IT, through the acquisition of Roche, SAP, and Motorola Solutions. In general, our restructuring is characterized by our desire to increase the quality of companies in the portfolio as well as raise the portfolio’s ESG score.


Is low-volatility equities still an interesting investment opportunity?

We would certainly say that it is still interesting to invest in Equities Low Volatility, as the portfolio has outperformed the global equity market since inception. The better return has been generated during a period of rising equity prices - 2013 to 2020 - and the portfolio has had a lower beta than the global market. Hence, the philosophy of Low Vol. anomaly has adhered.

Furthermore, there is some uncertainty for the time being, and the portfolio has shown that it outperforms the global market during a period of rising volatility and increased uncertainty. If investors want equity exposure, while simultaneously wanting to screen the most risky investments as well as a lower beta than the global market, then Equities Low Volatility is an interesting option.

 

Why Jyske Capital?

Jyske Bank's team at Equities Low Volatility is a very experienced team working exclusively with our Low Volatility fund. We established the fund in 2013 after a long period of research, as well as a desire to create a global equity fund with the return characteristics of the global equity market, but with better protection of capital in times of decline. We have thus personally been responsible for the design of the fund and investment process, so that we achieve the desired properties in terms of return and risk. With regard to the size of asset under management, the Low Volatility strategy, which includes our SICAV- and Danish funds with the exact same portfolio and investment strategy, can grow significantly compared to the current AUM. We only invest in large cap. companies.