The relationship between risk and reward is one of the most fundamental in finance: to get higher returns, say the traditional models, you must accept more risk. There’s just one problem with that idea: it’s not borne out by history. Over long periods, in most markets around the world, stocks with the highest volatility have not been the best performers—and during some periods, the least volatile companies have done significantly better. This low-volatility anomaly has been known since the 1970s, and has gained renewed popularity with the appearance of a number of ETFs designed to capitalize on it.
In the last year or so, BMO, iShares and PowerShares have all launched low-volatitly ETFs in Canada, and each them uses a quite different strategy. I’ll review these later in the week, but first, I’d like to share an excerpt from my recent interview with Jean Masson, managing director at TD Asset Management and an expert on low-vol strategies. Dr. Masson is the portfolio manager for the TD Canadian Low Volatility Class and the TD Global Low Volatility Fund, as well as two institutional funds based on similar strategies.