The AGIC systematic portfolio management team applies a quantitative approach to structuring Global Managed Volatility and U.S. Large Cap Managed Volatility portfolios. The team anticipates launching an international managed volatility strategy in February 2012.
The new strategies are founded on “the low volatility anomaly.” According to AGIC, contrary to widely accepted economic theory, portfolios of low-volatility stocks have proven to outperform high-volatility stock portfolios over time.
“Financial theory suggests markets are efficient and investors demand to be compensated for risk,” states Kunal Ghosh, portfolio manager. “Our empirical studies, however, directly refute the relationship between risk and reward.”
The AGIC systematic team seeks to identify stocks with complementary risk characteristics to create portfolios with lower expected risk and higher returns than their benchmarks.
The team exploits investor behavior biases, such as “loss aversion” where investors discount prospective future gains in favor of minimizing losses and “the lottery preference” where investors are drawn to stocks with a low possibility of a large future pay-off. In the latter case, the team’s research shows these stocks are more likely to become overpriced and therefore constitute an undue weight in a capitalization-weighted benchmark. Plus, stocks that combine a history of high volatility and extreme payoffs demonstrate markedly low future returns, according to AGIC’s research.
“Think of these high volatility stocks as baseball sluggers,” commented Mark Roemer, portfolio manager. “Investors tend to overpay for them on the chance they will knock one out of the park the next time at bat, when instead they are more likely to strike out. We prefer to invest in lower volatility stocks with more consistent returns - baseball players with high batting averages - who are more likely to get on base.”
For more information on AGIC’s managed volatility strategies, visit www.allianzgic.com.
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