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The low volatility anomaly in equity sectors revisited

Ten years after showing that the low volatility anomaly in the performance of stocks is a phenomenon that should be considered in each sector as opposed to on an absolute basis ignoring sectors, we present evidence that this observation has held up well, and that if anything, has become even more valid.

The low volatility anomaly refers to the fact that investing in less volatile stocks tends to generate returns that are higher than would be expected from their level of risk.

Robert Haugen and James Heins provided the first evidence of this 48 years ago. They showed that over the long term, portfolios investing systematically in the least volatile stocks would have delivered much higher than expected returns. Conversely, portfolios invested in the most volatile stocks would have significantly disappointed in terms of performance, according to their research.

The low volatility anomaly in sectors

Ten years ago, we launched our equity low volatility strategy, which was based on proprietary research on low-risk stocks.

One new result of our research at the time was evidence that the least volatile stocks from every activity sector had higher returns per unit of volatility than their respective riskier sector peers.

Indeed, we found that the low volatility anomaly is even observed in typically more volatile sectors such as information technology or industrials, irrespectively of their absolute level of volatility.

From the point of view of risk-adjusted returns, the least volatile stocks from every sector appeared to be equally good candidates for a low volatility portfolio designed to deliver higher risk-adjusted returns and lower volatility than achieved by investments in the market capitalisation indices typically used to benchmark such strategies.

This is why BNP Paribas Asset Management has opted for a strategy that invests in the least volatile stocks from all sectors.

10 years later…

A decade later, we decided to revisit our research and review 10 years of out-of-sample results. Had the least volatile stocks from each sector actually been more attractive than their riskier peers from the point of view of risk-adjusted returns, as we had found in our research?

As we show in our recent paper “The low volatility anomaly in equity sectors – 10 years later!” the answer is a resounding ‘yes’. If anything, the results were even stronger in this period. Below, we include some of the new results.

For each sector, we calculated the performance and volatility of two portfolios: one invests in the 10% least volatile stocks of a given sector and the other invests in the 10% most volatile stocks of the same sector, picked from the MSCI World index. Both portfolios were rebalanced monthly and the stocks were grouped into deciles based on historical volatility over the preceding three years.

Exhibit A shows the Sharpe ratio of such portfolios based on USD net monthly returns. The results, used to develop and promote our proprietary global low volatility strategy, are based on a simulation performed in early 2011 with data from the end of 1994 through to the end of 2010.

Exhibit B is similar to exhibit A, but is based on calculations just using the out-of-sample period from the end of 2010 through to the end of February 2020.

From these two exhibits, we find that in both periods, the Sharpe ratio of the least volatile stocks in a given sector was higher than the ratio of their most volatile peers almost everywhere.


It is reassuring to see the foundations of our low volatility investment philosophy confirmed in the out-of-sample data.

Our results show how important it is for low volatility strategies to be diversified and to be invested in the least volatile stocks of all sectors. Blindly minimising volatility, creating strong biases towards a small number of least volatile sectors, should not be the goal of low volatility investing.

Also read these posts on our Investors’ Corner blog on investing in stocks with a low volatility: 

“Predicting the returns of portfolios invested in low volatility stocks over short-term horizons, e.g. over a month or a quarter, is not easy. Because of the defensive beta, we can say that low volatility stock portfolios are likely to outperform the market capitalisation index when market returns are negative, but it is not certain that they will. Even if the alpha of low volatility stocks is positive on average over the medium and long-term, which explains their higher Sharpe ratios, since by definition the alpha is fully uncorrelated with market returns, the occasional negative short-term alpha during a market fall that may lead to underperformance is almost inevitable. Similarly, episodes of outperformance of low volatility stock portfolios even when the market rises, explained by the positive alpha of low volatility stocks, should not surprise.”

Source: What returns can be expected from investing in low volatility equities

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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