May 02, 2016
Disclaimer: The opinions expressed herein are that of RongViet Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.
Low-volatility anomaly has become popular since 2013. The anomaly implies that low-volatility stocks normally generate higher returns than high-volatility stocks could do. This is quite unusual to the common sense of “high risk high return”. This brief report will test wether the anomaly takes effect in Vietnam stock market or not. If it does, we will suggest a list of stocks that qualify this strategy. The investors; therefore, could have one more criterion to pick stocks in such hard time.
There are 2 main parts:
I. Introduction to “low-volatility anomaly”, whereas the definition, literature reviews will be provided.
II. Case study of Vietnam stock market, using the historical data from 2010 – 2015 and conclusions will be drawn as well as a (possible) list of recommended stocks.
Introduction to “Low-Volatility Anomaly”
Definition of volatility
Volatility, in portfolio management, is a statistical measure of dispersion of profit returns in a given period. Volatility can either be measured by using the standard deviation between a redefined series of returns which are calculated in term of continuous compounding. In our research, volatility is calculated by scaling daily standard deviation to n-month standard deviation.
Literature reviews on “low volatility anomaly”
This effect originated from the research of Fischer Black in 1972. This research showed that investors who assumed higher risk tolerance than market portfolio’s, could enhance the market portfolio return via leverage. When they were in constraint of either using leverage or facing high interest expense, they had another choice that they could buying high volatilite stocks. This led the other lower volatile stocks to be undervalued. In 1993, Rber Haugen, then, also supposed that low beta stocks could get higher return than high beta stocks. Many other researches arrived the similar results that high volatile stocks often gained lower return than low volatile stocks.
Reasons for “low volatility anomaly”
There were many researches explaining about this anomaly. Typically, Blitz, Fallkenstein and Van Vliet (2013) summarized many explainations in previous researches, such as: constraints on using leverage, short selling activitives; biases in measuring portfolio’s performance by using the predefined benchmarks, problems in portfolio management, and biases in research analyst’s recommendations… Among them, the three most popular reasons were (1) constraints in using leverage, (2) biases in research analyst’s recommendation: Hsu, Kudod and Yamada (2012) explained that these analysts tilted to give high growth forecast for high volatile stocks whose prices, then, were inflated unreasonably and (3) biases resulted from using a benchmark index for measuring the portfolio’s performance. Baker and Haugen (2012) explained that portfolio managers usually used a market index as a benchmark for measuring their portfolio’s performance. As a consequence of this, they tilted to not choose low volatile stocks for their portfolio since these stocks had less contribution in tracking the benchmark index than high volatile stocks. Besides, tracking error (the divergence between the portfolio return and the benchmark index return) was usually a critical factor affecting their management fee and bonous.
Low-Volatility Anomaly in Vietnam Stock Market
Testing the effect of low-volatility anomaly (2010 – 2015)
Based on historical adjusted prices of stocks listed in HSX and HNX in the period of 2010-2015, we did calculate the volatility by taking a 3-month standard deviation of daily returns and then sorting and dividing these stocks by their volatily
[Figure 8] shows that while high-volatility stocks generated a negative return of 0.9%, the low-volatility stocks earned a positive profit of 4.1%. The coefficient of variation (CV) of low-volatility group was also the best lowest one of 4.25.
Observing the the annual performance of these groups, we come to three conclusions:
(1) Between 2010 and 2012, all of the groups recorded negative returns; however, low-volatility groups were “less” negative than the higher ones.
(2) Those that have volatility less than 26% outperformed those have volatility higher than 26%.
(3) Investors might have recognized the trend of investing in low-volatility stocks since 2013. P1 (the portfolio that includes lowest volatile stocks) tended to performed better and step by step outperformed the rest groups in 2015.
We believe that the “low-volatilty anomaly” does exist in Vietnam stock market and is becoming more well-known. Market has been experiencing strong volatile since late 2015 and the trend has carried in till 1Q/2016. In Investment Strategy report at the beginning of this month, we have informed that this trend could be dominant in both domestic and global markets. Therefore, investing using low-volatility anomaly could be a good choice for investors.
Hereafter is a list of stocks that are suitable for this strategy. The screening criteria were solely based on quantitative and trading factors [See appendix]. There are lots of stocks that are currently in RongViet Research’s coverage list and have been updated via “RongViet Research Vietnam Equity strategy 2016” as well as in other materials such as company reports, analyst pin-board reports etc.
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