Low volatility strategies have achieved considerable market acceptance in the aftermath of the 2008 financial crisis. For most of the 12 years since then, skeptics have argued that low vol might become, and sometimes that it has become, overvalued. It’s an understandable concern, especially in light of the continuing popularity of low volatility strategies.
We recently updated our 2016 study of The Valuation of Low Volatility to see what, if any, impact valuations might have on the future performance of the S&P 500 Low Volatility Index®. Our most important conclusion now, as it was then, is that valuations have little relevance as a leading indicator of Low Vol performance.
The chart below summarizes this point in one picture. It maps the monthly valuation of Low Vol (relative to the S&P 500) against its relative performance in the subsequent month. If it looks scattered, that’s because it is; the correlation between this month’s valuation and next month’s performance is 0.03. As an indicator of entry and exit points for low volatility strategies, value does not appear to be valuable.
Scatter Plot of Monthly Relative Value Scores and S&P 500 Low Volatility Index Performance Spread in Subsequent Month Depicts No Relationship