It definitely could, believes Erik Rubingh, who manages a global equity market-neutral strategy at BMO Global Asset Management. “A lot of investors have piled into minimum volatility products. While people typically buy these products to have less negative returns on the downside, they may be surprised in a negative sense if rates go up more than expected,” he says.
So are low volatility, dividend-paying, bond-like as you wish, stocks indeed more vulnerable to a rate rises than other equities? Jason Williams, a portfolio manager at Lazard Asset Management, had his ‘quants team’ look into the matter. The outcome of their endeavours was that low volatility stocks “tend to underperform when there is a sharp increase in interest rates,” said Williams. “But the likelihood of sharp rate increases is probably very low at this stage, given the amount of leverage in the system.”
Defense unraveled
Jan Keuppens, manager of the Robeco Global Stars Fund, however, saw no reason to be sceptical of low volatility equities, pointing out that they have outperformed over the longer term. “If you look at 30 or 40 years of history of high quality, low vol companies in staples, food and telecoms, their downside beta is below their upside beta,” he said.
But is the Fed rate hike in December, which is now conceived as almost inevitable, actually a good thing? While most fund selectors and fund managers alike believe a rate hike is long overdue, Norway’s fund buyers are not so sure. Moreover, a small majority believe the Fed should postpone a rate hike to next year.
Click here for a full overview of the voting results from Expert Investor Norway.
