An Interview with Harindra de Silva
Welcome to my new blog, which will talk about the interesting financial services industry folks I meet in my role as editor in chief of Financial Planning. We frequently meet for breakfast, hence this title. I hope you’ll find interesting ideas, and perhaps have the occasion to meet up with me for early morning coffee and conversation.
This week, I had the pleasure of breakfasting with Harindra de Silva, president and portfolio manager at Analytic Investors, an investment firm that manages institutional portfolios and mutual funds using a quantitative approach and has about $7.2 billion under management. The firm is owned by Old Mutual. Many quant firms have suffered since the market meltdown in 2008, particularly long/short funds, and the long/short fund Harin co-managed, Old Mutual Analytic U.S. Long/Short, was no exception. But he has another portfolio that is doing quite well, and that’s what we discussed this week.
“The biggest change I’ve seen among clients has been that they’ve stopped wanting to beat the market,” Harin says. “The market is not going somewhere. Now risk matters more.” So he and his team have been paying more attention to reducing risk in a domestic and a global portfolio using what they call a Volatile Minus Stable (VMS) strategy. Simply put, they’re buying the stocks in the S & P (domestically) and MSCI World (globally) that are in the bottom quintile for volatility—that is, their prices have the lowest standard deviations. The strategy reduces the risk in a U.S. portfolio by 25% and in a global portfolio by 35%.
The VMS strategy is based on academic work done in the mid-nineties. Studies revealed that, over time, volatility provided no reward premium over stocks whose prices had less variance, owing to compounding effects. So about seven years ago, Harin decided to build an equity portfolio with no complexity, no shorting, just low risk. “My partners thought, ‘here’s one more oddball idea,’” he says. “Then a pension plan called up and requested a pitch book.”
Research Harin did with his colleagues Roger G. Clarke, Analytic’s chairman, and Steven Thorley, Analytic’s research advisor, showed that over time, volatility gave you no premium on performance. “Most investors expect that a portfolio with more volatility will have a higher return. Our research challenges this belief, showing that over long periods, there has been no extra reward for choosing volatile stocks over stable stocks,” they wrote in a paper published in the Winter 2010 issue of The Journal of Portfolio Management.
Today, the low-volatility idea has begun to spread. MSCI has come with the MSCI Minimum Variance index, which mimics it; someone (not Harin) has licensed it for an ETF. A mutual fund version of Harin’s portfolio is available on the SEI platform, SEI Instl Mgd US Managed Volatility A [SVOAX]. For investors looking for a smoother ride, this might be a sound approach.