FINANCIAL ADVISOR INSIGHTS: Boring Low Volatility Strategies Almost Always Outperform

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.

Low Volatility Stocks Outperform Riskier Ones (Advisor Perspectives)

A greenhorn investor might believe that with high risks come high rewards. But research by the Late Professor Robert A. Haugen, showed low risk stocks perform better than their riskier counterparts. What's more this low volatility success didn't just follow from the Great Recession.

"It would have proved most unfortunate to implement a low volatility portfolio at the outset of the dot-com bubble in the late 1990s: on an annualized basis, low volatility strategies underperformed their cap-weighted counterparts by large margins—18.5% in the United States and 7.4% in the Developed ex U.S. markets—over the following three years.

However, outside of raging bull markets, it is not the case that low volatility portfolios always underperform when prices are rising. In the bull market of 2003–2006, low volatility investments provided higher returns than cap-weighted portfolios with approximately 25% lower risk. During the two most recent market collapses, the bursting of the high tech bubble and the Global Financial Crisis, the low volatility strategies significantly outperformed traditional cap-weighted investing while maintaining the desired low-risk profile.

Money Market Funds Hoping To Stave Off Tougher Regulation By Disclosing More (The Wall St. Journal)

Money market funds are voluntarily increasing transparency in hopes of delaying or preventing stricter regulations, but the strategy is probably not going to work.

"Part of the rationale behind this move is that investors and regulators will be able to see the underlying mark-to-market NAV of the fund every day, yet still enjoy the convenience of trading the fund at $1 per share," Jerry Klein, managing director and partner at HighTower's Treasury Partners, told the WSJ.

Institutional investors appreciate the increased transparency but the new disclosures don't offer much additional insight.

Chinese Volatility Means This Is A Good Time To Buy (Mark Mobius)

The Chinese markets have been a rollercoaster all of last year, which scared off a lot of investor. And that's exactly why the Chinese market is cheap right now. Equity valuations overall are currently not much above their 2008 lows, said Templeton's Mark Mobius, in a note.

"China’s local equity market appears relatively cheap at the moment with the Shanghai A shares average price/earnings ratio at 12 times, as of mid-January 2013," he said.

The Economy Is In A Misnky-esque "Ponzi Finance" Phase Right Now (PIMCO)

In his latest investment outlook Pimco's Bill Gross draws on Hyman Minsky in saying that the U.S. economy is currently in a state "when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result."

Gross said that new credit is providing diminishing returns. "Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result."

This is because more money is being channeled into market speculation than should be.

The "Great Rotation" Doesn't Mean Stock Prices Are Going To Go Up (Morgan Stanley)

Even though a "great rotation" from debt into equity could happen in 2013, this doesn't mean that stock prices are going to go up, according to Morgan Stanley's Gerard Minack.

He is skeptical of the rise in stock prices for three key reasons. First, there is no evidence that money moved out of stocks and into debt in recent years, in fact equity ETFs have seen bigger inflows. Second, U.S. pension funds' exposure to equities is already above its long-term average of 50 percent. Third, economic fundamentals are still the biggest open question.

"For sure," Minack says, "if the fundamentals continue to improve, equities will do better, and flows may shift."