No news is good news.
At least for investors seeking stable returns, it’s better to buy companies that aren’t in the spotlight. To exploit a so-called low-volatility anomaly, the head of quantitative equity management at BNP Paribas SA invests in stocks that seldom get any attention in the media.
“People are attracted by companies where they get a lot of information,” Laurent Lagarde said in an interview in Oslo. “They tend to prefer more volatile stocks for this reason. If you have a lot news on a company it means there are events and there’s volatility”
Smart beta, or factor-based, and low volatility stock funds have gained popularity as investors hunt for yield in an era of low interest rates. Low volatility stocks should have a higher risk-adjusted return than high volatility stocks because of behavioral biases, according to Lagarde, who oversees 5.5 billion euros ($6.2 billion).
“The mechanism is very simple,” he said. “Investors prefer more volatile stocks and that will reduce the expected future returns. By investing in low vol stocks you would expect more return.”
The BNP Paribas Flexi I Equity World Pure Low Volatility fund held companies such as Starhub Ltd., American Water Works Co. and telecom operator Telus Corp. as of March 31. It returned 12 percent a year on average over the past three years and beat 82 percent of its peers, according to data compiled by Bloomberg.
Lagarde, who manages about 40 funds and mandates with his team of four, also uses factors such as value and quality when investing in his other funds. But his team stays away from trying to time the market.
“It’s very complex to introduce factor timing,” he said. “It’s a bit risky because you can be late to the exposure of a factor.”