The Waterside Convention 2011 Invesco - Volatiliteit: een anomalie?

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The Waterside Convention 2011 Invesco - Volatiliteit: een anomalie?

  1. 1. Volatility – an anomaly?Michael FraikinHead of Portfolio ManagementInvesco Global Quantitative Equity27th of January 2011This presentation is exclusively for use byprofessional clients and financial advisors inContinental Europe and is not for retail client use.Please do not redistribute.
  2. 2. Table of contents1. Volatility Anomaly – Theory vs. practice2. Investment Process – A possible approach3. Performance – Alpha opportunity in a European context2
  3. 3. 1. Volatility Anomaly –Theory vs. practice
  4. 4. Theory:More risk = more return and the combinations of market andrisk free asset dominates all other portfolio capital allocation line efficient return market portfolio frontier portfolios R0 minimum-variance portfolio riskCAPM: Capital Asset Pricing ModelR0: risk free rateFor illustration only4
  5. 5. What we observe: higher risk is not rewarded 60% 40% Annualised Return 20% 0% -20% -40% The slope of the regression line is negative! -60% 0% 10% 20% 30% 40% 50% 60% 70% 80% Annualised VolatilitySource Bloomberg, Invesco Research, European equities members of the Stoxx 600 over the period 30.06.2002 to 30.06.2010(8 years). Volatility is calculated as annualised standard deviation of monthly returns.5
  6. 6. Highest volatility stocks underperform 10% 100% Return per decile 9% 90% 8% 80% Annualised Return Average Volatility 7% 70% 6% 60% 5% 50% 4% 40% Volatility per decile 3% 30% 2% 20% 1% 10% Return (lhs) Volatility (rhs) 0% 0% 1 2 3 4 5 6 7 8 9 10 Volatility Decile Decile 1 = 10% of stocks in sample with lowest volatility: 8% return p.a. with volatility <20% Decile 10 = 10% of stocks in sample with highest volatility: 3x the volatility for 1/3 of the returnSource Bloomberg, Invesco Research, European equities members of the Stoxx 600 over the period 30.06.2002 to 30.06.2010(8 years). Volatility is calculated as annualised standard deviation of monthly returns.6
  7. 7. Long-term evidence: Relative Performance of European Risk Factors220 220 Momentum200 Earnings yield 200 Dividend yield180 Value 180 Liquidity160 Size 160 Leverage140 Growth 140 Volatility120 120100 100 80 80 60 60Dez-1994 Dez-1996 Dez-1998 Dez-2000 Dez-2002 Dez-2004 Dez-2006 Dez-2008 Dez-2010 Source Barra, Invesco Research Data from 12/1994 to 12/2010, For illustrative purposes only 7
  8. 8. Long-term evidence: the world Minimum Variance MSCI Hedged Return 1 yr 0.18% 10.32% 3 yr -5.76% -4.94% 5 yr 0.67% 1.34% 10 yr 3.93% 3.09% 30. Apr. 93 7.88% 8.89% Volatility 1 yr 6.62% 16.09% 3 yr 10.10% 21.05% 5 yr 9.04% 17.14% 10 yr 8.56% 15.72% 30. Apr. 93 8.16% 14.73%Quelle: MSCI Barra, Invesco Research, 04/1993 bis 12/2010. Based on a simulation of aminimum-variance portfolio. For illustration only.8
  9. 9. Long-term evidence: the world 3 y e a r r o l l i n g r i sk l e v e l s 25% 20% 15% 10% 5% 0% Dez 96 Dez 97 Dez 98 Dez 99 Dez 00 Dez 01 Dez 02 Dez 03 Dez 04 Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Mi ni mumVar i ance MSCI Wor l d HedgedQuelle: MSCI Barra, Invesco Research, 04/1993 bis 12/2010. Based on a simulation of aminimum-variance portfolio. For illustration only.9
  10. 10. Evidence:More risk does not necessarily mean more return capital allocation line efficient return market portfolio frontier portfolios R0 minimum-variance portfolio riskCAPM: Capital Asset Pricing ModelR0: risk free returnFor illustration only10
  11. 11. Possible reasons• Investment restrictions — To increase equity market participation some investors may prefer high beta portfolios effectively circumventing their investment restrictions. The reverse will not be the case — High beta seems an easy strategy to outperform a risky asset class — High beta stocks tend to be small and more difficult to short limiting arbitrage• Behavioural reasons — Some investors tend to think in terms of more or less risky asset classes and may ignore the less volatile, seemingly boring end of a more risky asset class — Blindly trusting CAPM investors expect high return = high risk and concentrate on the easier task of forecasting risk• Lottery effect — Stocks with high volatility can deliver outsized returns and some investors are (may be unwittingly) prepared to pay a premium for that11
  12. 12. 2. Investment Process –A possible approach
  13. 13. Unconstrained Optimisation: Exit benchmark-orientation§ Strict risk management ® Limited volatility ® Absolute position limits in terms of stock, sector, country and regional weights ® Liquidity bounds ® Constructing the portfolio with absolute risk aversion§ Stronger focus on stock selection ® Avoiding unattractive index heavy weights ® High tracking error versus index ® Ability to emphasise attractive stocks11 Based on Invesco GQE forecasts13
  14. 14. Portfolio Characteristics§ Diversified portfolio — Maximum stock position1 2,5% — Maximum industry weight1 25,0%§ Selected from a universe of 800 (3300) European (Global) stocks — Minimum requirements in terms of float and market cap — Holdings limited to 50% of average daily volume1§ Expected risk below market risk — Portfolio beta below 1§ Fully invested — No strategic cash — No short1 at rebalancing14
  15. 15. Quantifying our insights: Stock Selection Model Stock Selection Universe Earnings Management Concepts Price Trend Relative Value Momentum Action Are earnings improving What does the market What is management What are the expectations or deteriorating? movement tell us? telling us? relative to fundamental measures? • Estimate Revision • Long-Term Strength • Capital Allocation • Earnings Yield • Earnings Momentum • Risk-adjusted • Earnings Accruals • Cash Flow Yield • Revisions Against Relative Strength • Fundamental Health • Dividend Yield Factors1 Trend • Business Cycle Score Reversal • Liability Payback • Short-Term Reversal Horizon • Volatility Jump • Capital Expenditures Forecasted ReturnFor illustrative purposes only1 Not all factors are used in all regions15
  16. 16. Engineering the Optimal Portfolio Stock Return Stock Risk Forecasts Forecasts Transaction Cost Optimization Portfolio Guidelines Forecast through GPMS1 & Constraints Final Review PortfolioGlobal Portfolio Management System1For illustrative purposes only16
  17. 17. Summary§ Less risk does not necessarily mean less return§ Combining low volatility and stock selection has generated appealing returns§ Attractive diversification from both index oriented as well as traditional fundamental portfolio management17
  18. 18. • This marketing document is exclusively for use by professional clients and financial advisors in Netherlands and is not for retail client use. Please do not redistribute. Data as at 31 December 2010, unless otherwise stated.• For information on fund registrations, please refer to the appropriate internet site or your local Invesco office. This marketing document does not form part of any prospectus. Whilst great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Opinions and forecasts are subject to change without notice. The value of investments and the income from them can go down as well as up (this may partly be the result of exchange rate fluctuations in investments which have an exposure to foreign currencies) and investors may not get back the amount invested. Past performance is not an indication of future performance provides no guarantee for the future and is not constant over time. The performance data shown does not take account of the commissions and costs incurred on the issue and redemption of units. Any reference to a ranking, a rating or an award provides no guarantee for future performance results and is not constant over time. Investors should read the fund simplified and full prospectuses for specific risk factors and further information. This document is not an invitation to subscribe for shares in the fund and is by way of information only. It is not intended to provide specific investment advice including, without limitation, investment, financial, legal, accounting or tax advice, or to make any recommendations about the suitability of the fund(s) for the circumstances of any particular investor. You should take appropriate advice as to any securities, taxation or other legislation affecting you personally prior to investment. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations. www.invescoeurope.com• This document is issued in the Netherlands by Invesco Asset Management S.A. (Dutch Branch), J.C. Geesinkweg 999 1096 AZ Amsterdam18

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