Should clients avoid low-volatility stocks?

When global economies are on shaky ground, investors prefer low-volatility stocks.

Currently, however, these securities aren’t attractively priced, says Michael Peterson, managing principal and portfolio manager for International, European and Global Value Strategies at Pzena Investment Management in New York. He manages the Renaissance Global Value Fund.

This isn’t surprising, he adds, since clients started flocking to low-volatility stocks when prices dipped in 1999. As a result, valuations have risen and there are more attractive places to be.

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Convincing clients to make the switch won’t be easy, however, since investors are still worried about where global growth is headed, says Peterson. That’s because of the “events of 2008, and you can also look back to Europe in 2011.” As well, “we haven’t been in a robust economic growth period” since 2006.

Further, if you look at the backward price charts of low-volatility stocks, you’ll see that they’ve had a strong run over the last seven years. Conversely, the higher-beta sector of the market “was a disastrous place to be in 2008 and 2011.”

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So, you need to show clients that sector hasn’t “really recovered to the extent that you would normally expect” following a recession. That means valuations are still depressed and there are opportunities to uncover.

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