Equities Low Volatility during the COVID-19 crisis


Our approach to investing in low volatility equities

The philosophy behind investing in equities with low volatility is that equities with low volatility - measured by price fluctuations - offer a better risk-adjusted return over the long term than investing in  equities with high volatility. This is usually referred to as the low volatility anomaly. Numerous researchers have tried to explain and test the low volatility anomaly, and the conclusions are that investors are not rewarded for taking more risk.

Our strategy - Equities Low Volatility - seek to exploit the low volatility anomaly as much as possible. We remove the half of the market with the highest volatility, and only invest in the half of the market with the lowest volatility. The majority of the investments are in equities that are in the lowest quartile of the market in terms of volatility.

In addition to equities with low volatility, we also seek companies with high fundamental quality. The quality factor comes from investment in companies with stable and high return on invested capital.  We are also looking for companies with either narrow or wide moat, and a fairly protected business model.

We have followed this philosophy since the inception of the fund in 2013, and this has been extremely successful. Furthermore, it is our aim to have a portfolio of around 90 companies with a broad exposure to regions and sectors, thereby ensuring optimal diversification and protection of the capital invested.

COVID-19 crisis

The COVID-19 crisis has changed the way in which the investment community perceives risk. We have seen some equities expected to perform well during an economic recession due to their defensive business models actually did not maintain their defensive characteristics. The COVID-19 crises is quite unusual compared to former economic crises. Very few had expected a crisis characterized by a global lockdown of all air traffic and department stores, and suddenly IT equities being the safest investments in the world.

The global equity markets have been just as confused as the global politicians in their actions during this crisis. In the period with the most bearish market, 19 February 2020 to 23 March 2020, the fund outperformed the global equity market (MSCI AC World). We had initially expected that the strategy would have performed even better in relative terms over the period, but the crisis made IT equities, in which the strategy has an underweight position, a reasonably safe investment. Thus, the better performance from IT companies has diminished our outperformance in relative terms. Meanwhile real estate companies with a stable business model, in which the fund has an overweight position, fell more than expected. The overweight of the strategy in stable sectors such as consumer staples (food producers) and the communications sector (telecommunications companies) supported our relative performance during the most bearish period.

The significant monetary and fiscal easing measures caused the equity market to rise sharply from the end of March. Amid these sharp increases, the fund’s low risk and beta below one has resulted in a lower return 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 they were or will be directly affected by the crisis. Examples of such transactions are our sale of Klepierre, a real estate company that manages department stores, Welltower, a real estate company which is a landlord for senior homes in the US, and Disney, which had to close their theme parks. The second group of transactions covers increased exposure to utilities through buying National Grid and Consolidated Edison as well as increased exposure to Health Care and ITthrough the purchase of Roche, SAP and Motorola Solutions. In general, our transactions are characterised by the desire to increase the quality of the companies in the portfolio as well as to raise the portfolio’s ESG profile.

Are low volatility equities still an interesting investment opportunity?

We would certainly claim that it is still interesting to invest in Equities Low Volatility as the strategy has outperformed the global equity market since inception. The outperformance has been generated during a period of rising equity prices - 2013 to 2020 - and the strategy has had a lower risk than the global market. Hence, the philosophy behind the low volatility anomaly has proven its worth.

Furthermore, the market is currently dominated by uncertainty, and the strategy has shown that it outperforms the global market during period of rising volatility and increased uncertainty. If investors want equity exposure, but want to eliminate the most risky investments, and at the same time want a lower risk than the global market, Equities Low Volatility is an interesting opportunity.

Why Jyske Capital?

Jyske Bank's team covering Equities Low Volatility is a very experienced team working exclusively with our low volatility strategy. We established the fund in 2013 after a long period of research, founded in the ambition to create a global equity strategy with the return characteristics of the global equity market, but with better protection of wealth in bearish markets. We have thus designed the strategy and investment process, so we achieve the desired characteristics in terms of return and risk. With regard to the size of assets under management, the low volatility strategy, which includes our UCITS and SICAV funds with identical portfolios and investment strategies.