#AltQuantSummit – Can High Returns be Generated through a Low-Risk Approach?

CFA Institute and CFA Society India members and participants were fortunate to hear from Pim Van Vliet, Head of Conservative Equities and Chief Quant Strategist, Robeco  Asset Management on ‘Unlocking the Power of Quantitative Investing” during the India Alternative and Quant Investing Summit held in Chennai. The session was expertly moderated by Ravi Saraogi, CFA, Co-Founder of Samasthiti Advisors. Pim has evangelized a proprietary approach to conservative equities investing, and his team at Robeco currently manages EUR 12.5 billion in assets.

Pim started with the intriguing observation that based on empirical evidence, the tenet of higher risk resulting in higher returns put forth by the CAPM does not hold. He stated that this was the biggest anomaly in finance and his life mission is to promote “high returns through low risk” investing.

He then shared an approach for a Conservative Equities strategy where factors like low volatility, combined with momentum are used for stock selection. The biggest strength of this approach is that none of the factors depend on accounting data and accounting measures.

Pim then shared a series of charts demonstrating that this conservative investing portfolio has generated higher risk-adjusted returns across market cycles and in the US, Europe, Japan and Emerging Markets. The charts conveyed that more volatile stocks yield lower returns, while less volatile stocks deliver higher long-term performance.  Further, the conservative investing formula beat all traditional factors such as value, momentum and size (US stocks 1929-2016 data).  Charts based on the US market data also depicted that conservative formula investing has generated higher returns than speculative or high-risk investing both in the 19th century and the 20th century.

The stock selection for the Conservative Equities portfolio was based on the following approach: (a) From the largest 1,000 stocks, select 500 stocks with the lowest three-year volatility, (b) From these 500 stocks, rank and select 100 stocks with the best net-payout-yield and price momentum (c) Use this universe to build an equally-weighted portfolio, which is rebalanced every quarter.

Pim also shared research data for the Indian market (paper published by Rajan Raju and Anish Teli) , whereby a basket of 100 stocks with quarterly balance significantly outperformed the S&P BSE 100 .  The research utilized data from the 1000 largest stocks and selected 100 liquid stocks based on low volatility, high net payout yield and strong price momentum. The period of research was Sep 2006 to June 2022 – thus covering major periods of depression and bull runs. Here too conservative investing delivered a higher Sharpe ratio versus popular approaches such as mid-cap investing, single factor and other multi-factor indices.

The conclusion was that this approach delivers excellent downside protection with good upside performance (conservative investing slightly lags in bull markets), thus balancing capital preservation and capital growth. By losing less during market sell-offs, the strategy delivers higher and more stable compounded returns than the market over a full cycle.

There were other fascinating insights shared by Pim. For one, investors are more biased towards higher volatility stocks due to the importance given to benchmarks and relative returns by institutional investors.  Low volatility portfolios may deviate significantly compared to the benchmark. Second, institutional investors are also constrained by mandated limits on leverage. Lastly, there is a tendency among investors to prefer risky stocks with lottery pay-offs. He also stated his view that conservative investing is very democratic as retail investors who are not constrained by benchmarks can better exploit this factor versus institutional investors.

We were truly fortunate to be a part of this unique event, and hear first-hand from a seasoned quant practitioner, with deep ties to academia as well. Given that the conservative investing approach works across different time periods, regimes and market structures, investors can certainly consider conservative stocks in their asset allocation.