The Benefits Of A Lower Volatility Strategy In An Uncertain Market

The Benefits Of A Lower Volatility Strategy In An Uncertain Market by Jay Kaplan

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.

Watch the video here.

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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.

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.