Pim van Vliet is a Dutch portfolio manager for the quantitative equities team at Robeco. He’s the author of different scientific papers and books, primarily about low-volatility investing. In his book ‘High returns from low risk: a remarkable stock market paradox’ he devised a strategy that provides above market returns by investing in low volatility stocks.
The Capital Asset Pricing Model (CAPM) is widely used to predict the risk of investments. The model assumes that returns can be predicted by a lineair model that uses volatility of the asset compared to the market. While this model was widely adopted throughout the finance industry, different academics soon challenged the assumptions used as they were not supported by empirical evidence. One of the first to do this was professor Robert Haugen, who questioned the methodology used to produce the supporting empirical evidence. (link: click here) Different studies confirmed Mr Haugen’s findings, however as it was counterintuitive, the investment community still uses the CAPM to this day.
Pim built his strategy around this low-volatility anomaly or investment paradox, but he added two other factors into the mix.
To get the list of stocks, Pim runs through the following steps:
This formula selects:
low-risk companies that ‘conservatively’ deploy their capital, as they would rather distribute money to their shareholders than spend it on corporate activities themselves. The formula is also ‘conservative’ with regards to the timing. These stocks are only included when their business momentum improves and other investors have started to bid up their prices.
The author backtested this model over the period 1929-2015 and found that this model generated a 15% return per year. Compared to a portfolio of high-volatility stocks, it also proved to be more stable during more difficult periods.
Click here to go to Pim van Vliet's website.
Pim was so kind to provide us with guidance and feedback on how to best build his screen. We took the following steps: