Low volatility funds have become quite popular of late, as many look for ways to protect their nest eggs from the market.
While there isn’t a lot of track record on many of these funds, this RBC offering has shown a lot of promise. Managed by a team headed up by Bill Tilford, the investment process is very quant focused that looks to minimize the fluctuations of the portfolio while still providing strong returns.
The process starts by rating and ranking each stock on a number of different fundamental criteria that are both forward and backward looking. The team then reviews a number of stability measures, which are also scored.
The team then generates a risk forecast for each stock, which is then used as an input in the manager’s portfolio optimization model. The portfolio is optimized twice – once using a more traditional approach and the second time using more predictive factors. The final step is a more fundamental review that is completed by the team.
The result is a large cap focused portfolio, holding around 70 names. Given the emphasis on low volatility, it is not surprising to see it significantly overweight in defensive sectors like utilities, consumer staples and telecom. A drawback to this is investors have bid up the value of these sectors significantly, resulting in a portfolio that is much more richly valued than the broader market. That will make it tough, although not impossible to repeat the recent level of outperformance the fund has experienced. While the broader Canadian market dropped nearly 13%, this fund eked out a small gain. However, as we see stability return to the energy market, expect this fund to lag. Also, it would be expected to lag in most market rallies. Still, for more conservative investors looking for core equity exposure, this might be worth taking a look at.