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Low Volatility – One Factor or Several?

park-bench-waterfall-1202609-639x427Once a month in our Equity Observer  publication we share our analysis of what stock selection factors are working.  This year the best performing factor in our global sample is “low volatility”.

The issue of what constitutes a factor will be endlessly debated, but while “low vol” does not quite rank up there among academics with the original Fama-French-Carhart variables (market, size, value, momentum) there is nevertheless a growing investor demand for lower volatility strategies.

The growing demand for “low vol” strategies does not seem entirely driven by the performance of these strategies relative to core benchmarks.  For example over the 2015-2013 period the S&P Low Volatility Index under-performed the S&P 500 core index by 3.4% annualized.  Yet demand for these strategies appears to have grown as manifested by the large number of new ETF’s launches in this space.

Investors seem particularly interested in the capital preservation characteristics of “low vol” strategies and appear willing to sacrifice returns during the good times in return for less pronounced equity market downdrafts.

Low volatility strategies seem here to stay.  Given their market beating returns thus far in 2016 it is reasonable to expect growing interest.  We therefore analyze our global sample of 13,000 stocks to ascertain the basic characteristics of low volatility stocks. Vol_decile

Stocks in the lowest volatility decile have an average return volatility of 20%

Higher volatility stocks exhibit low levels of market sensitivity (beta)

During periods of equity market stress ‘low vol” strategies should out-perform broad market indices

The lowest volatility decile enjoys the highest current yields while the “high vol” names in Decile 10 barely register for income

Lower volatility stocks have lost their historical valuation advantages.  The growing demand for ‘low vol” and its close cousin dividend income have eroded the typically lower valuations seen in lower volatility sectors and stocks.

low vol returnsEven after adjusting for sector and region/country effects we observe a strong monotonic relationship in YTD returns across volatility deciles.

The lowest volatility stocks (Decile 1) have had the highest 2016 returns while the highest volatility stocks have shown the greatest losses.


Our general conclusion is that “low volatility” strategies play a useful role for investors looking to provide short-term downward protection in their equity portfolios.  However, we think of “low vol” as part of a package of stock attributes designed to lessen market exposure during periods of equity market stress.  These strategies along with lower betas, higher yields and exposure to more stable sectors should exhibit lower levels of downside capture.

Investors worried about equity market downturns should not view these strategies as a substitute for properly assessing and managing the risk of their overall portfolios.

Click here to download the report: Low Volatility – One Factor or Several?


Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC


From Bear Market to Sector Rotation – It’s All a Bit Confusing Now!

This year has been a roller coaster for global equity investors. From the weak start to the year to the recovery in early March it has left investors with more questions than answers.  Are we in a bear market? Are we just pausing until global growth resumes?

Lots of questions and few answers, but maybe we can distill some useful information from the recent price action of global equity markets. In a world where the headlines revolve around broad market indices such as the S&P 500 or the Nikkei 225 much is left unexplored.

In this note we look at the technical characteristics of our global equity sample (13,000 stocks) for clues as to what may be going on behind the scenes. We search the readings from our Technical Stage Model for clues. For further details on our methodology please read our post Getting All Technical

technical stages chart

What we find is great investor indecision – over 40% of stocks in our global sample reside in the Improving Stage.  

While historically one would expect these stocks to keep on moving up higher to the Break Out Stage there is also a non-trivial probability of regressing to the Down Turn Stage hence our characterization of the Improving Stage as indecisive.

We also find a strong rotation away from sectors and equity styles that out-performed last year toward much maligned resource-oriented sectors and countries.

Is the current technical picture more consistent with a Bear Market or an ongoing strong sector rotation toward out-of-favor sectors?  Will the recovery in resource- oriented sectors last?

Click here to download the report:Strong Sector Rotation or a Bear Market?


Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC


Looking for a Second Income? Take a Look at Dividend Stocks.

newspaper-job-section-1427231-639x372How about adding dividend stocks to your portfolio to complete the job that bonds can’t at the moment?

For some ideas regarding the difference between high yield stocks and dividend growth equities take a look at our latest white paper – Click here to download the report: “Equity Income For the Yield Starved Investor

Some of our report conclusions:

►High Dividend Yield stocks tend to be inexpensive but lacking in growth and historically have been members of distressed categories

►High Dividend Growth stocks are only slightly more expensive than their lower growth peers but exhibit much higher rates of prospective earnings growth as well as superior profitability

►Our overall conclusion is that High Dividend Growth stocks are not materially over-valued versus lower growth companies and that there is an adequate margin of safety to fund dividends out of earnings growth

►We strongly suggest employing dividend growth strategies as the preferred way to implement income generation programs

►We also believe that significant dividend growth opportunities exist outside of the major equity markets so a global perspective is recommended

►Finally, priority should be given to the analysis of company fundamentals in terms of their ability to increase dividends in a financially responsible manner while also allowing the investor a margin of principal (price) protection


Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC


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