The Benefits of a Lower Volatility Strategy in an Uncertain Market
article , video 08-24-2016

The Benefits of a Lower Volatility Strategy in an Uncertain Market

Portfolio Manager Jay Kaplan explains the benefits of lower volatility stocks in uncertain markets, including downside protection, and why he finds dividend-paying companies attractive. 


The Benefits of a Lower Volatility Strategy in an Uncertain Market

When markets are uncertain and markets are volatile and they're really moving around a lot, lower volatility stocks tend to move around less. When markets go straight up they often don't go up as much, and for us that's okay.

And when markets go down, hopefully they go down less which is good for us, and point-to-point, throughout volatility cycles, that has resulted in good risk-adjusted returns. 

There's some math that goes with this that's kind of fun. If you think about owning $100 stock that goes down 50%, it’s now worth $50, and you may say, and people commonly do, "Okay, now I have to go up 50% to get whole again." Well, that math doesn't really work. If I'm at $50 and I go up 50%, 50% of fifty is 25. I've now gone up to 75. So if I've gone down 50% and up 50%, my hundred became seventy-five.

So downside protection and going down less in down markets helps you on the way back up. You have less room to go to recapture your losses.

Over a very long period of time, particularly in choppy markets, lower volatility, dividend-paying stocks that exhibit those characteristics have led to very good returns.

Dividend-Paying Small-Caps Outperformed Non-Dividend-Paying Small-Caps...With Lower Volatility


Standard deviation is a statistical measure within which a fund's total returns have varied over time. The greater the standard deviation, the greater a fund’s volatility.

If you look at the Russell 2000 over time and you slice it into the companies that pay dividends and the companies that don't pay dividends, over time the dividend-paying companies have done better. The dividend-paying companies have had less volatility. And particularly in the down markets, you've had much better performance from the dividend-paying stocks.

Why Are Dividend-Paying Companies Attractive?

When you invest in dividend-paying stocks not only do you get the dividend, you get some other things. Oftentimes you get the maturity of a business model, which we like a lot.

Often you get really good signals about management teams and capital allocations. Management teams can destroy capital or they can do good things with capital.

We think folks who have a good track record of returning capital when they don't have other projects that have a good risk-adjusted return, we think those managements teams tend to be pretty good and dividends are a great signal of that.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of July 12, 2016 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.



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