Low Volatility Investing: When the risk/reward relationship was flipped on its head

Published: 28/02/2020

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Confident Investing

"Whenever you see a successful business, someone once made a courageous decision." ~ Peter Drucker (1995)

Summer of 2009. The world was just recovering from the Great Financial Crisis - one of the worst economic disasters since the Great Depression. New realities were settling in for investors, and, intuitively, it was not the greatest of times to try new and unproven investment strategies.

But during some of the worst trials and tribulations, success and advancement often comes to those bold enough to challenge the status quo and seek something greater. Who would have the fortitude to go against the grain at this juncture?

The new thinking at TDAM never stops

With two years of research and conceptualization already in the books, the gifted minds of our Quantitative Team pushed through the financial crisis with a little-known concept called "low volatility investing". At a high level, the concept sought to prove that a long-only equity portfolio, built in a way to have the minimum possible risk, could outperform not only the capitalization-weighted market index but also most other active strategies. Was it possible that such an idea - considered heresy by mainstream financial think tanks - could grow to become one of the biggest success stories in the recent history of Canadian financial innovations?

Over 10 years of our Low Volatility strategies

On September 11, 2009 the TD Emerald Low Volatility Canadian Equity Pooled Fund Trust was officially launched as the first of its kind in Canada and made available to institutional investors.

Although an exciting time, the launch was barely noticed as the world was still healing from wounds inflicted by the financial crisis. However, after two years of near-missionary work to explain, convince and promote low volatility investing, the Fund gradually became better understood, leading to an increase in investor confidence.

In Fall 2011, the TDAM Quantitative Team was approached to evaluate the feasibility of launching versions of the Emerald funds for the broader public - a brave new step. By the end of the year, TDAM launched the first retail investor-focused solution – the TD Global Low Volatility Fund. The strategy was clearly building credibility in the investment industry, and this new offering gained traction right away.

Fast forward 10 years to today, and TDAM now has 4 successful Low Volatility funds for retail investors, 6 for institutional investors and 1 Low Volatility ETF (with possibly more on the horizon).

Low Volatility Investing in 2020 and beyond

When looking at what the future holds for low volatility investing, new methods such as machine learning algorithms are gradually appearing in our quantitative arsenal alongside true and proven statistical and fundamental risk modelling techniques. State-of-the-art estimation techniques based on mixtures of distributions and the use of multiple risk models in our portfolio construction are currently being researched to help push the frontier of risk reduction even further.

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