The popularity of low-volatility strategies during the latest period of market turbulence has not diminished their effectiveness.

A review of performance of the MSCI Minimum Volatility Indexes from the start of the year through Feb. 12 shows the strong outperformance of the strategy despite investors having bid up the protection that this strategy aims to offer.

The fitfulness of the global recovery has produced quick and unexpected changes in financial markets and handed portfolio managers the challenge of allocating assets amid the market stress. That has renewed interest in low volatility strategies, which aim to afford institutional investors broad exposure to the market with lower risk.

As the chart below shows, the MSCI ACWI Minimum Volatility Index, which is designed to reduce risk compared with the broad market, has outperformed the global market, as measured by the MSCI ACWI Index, by 7.3%, since the start of the year. The regional and country versions of the MSCI Minimum Volatility Index also have outperformed their respective market-cap weighted parent indexes over the same period.

 

YEAR-TO-DATE PERFORMANCE OF THE MSCI MINIMUM VOLATILITY INDEXES RELATIVE TO their msci parent index

Note that the valuation of Minimum Volatility did not diminish the strategy’s effectiveness.  As the chart below shows, the MSCI Minimum Volatility Indexes closed on Feb. 12 slightly more expensive compared with its history, which reflects demand for low volatility strategies during the latest period of stress.

 

Valuation Levels For MSCI Minimum Volatility Indexes Relative to 15-Year History

Data as of Feb. 12, 2016. Average over the period November 2001 to January 2016

Based on price to earnings, price to book value, price to cash earnings and price to sales at month end dates. A current value below average indicates that the factor is cheap relative to its own history. The line endpoints indicate historical minima and maxima.

 

Still, the value of the protection that the tilt toward lower risk aims to provide exceeded the run-up in valuation. The premium that investors have paid for low volatility since the start of the year reflects the falloff in the broad market more than it does the relative richness of the strategy compared with its historical average.