Home' Trinidad and Tobago Guardian : January 24th 2015 Contents JANUARY 24 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
OF MUTUAL INTEREST | SBG11
Freaked out by the stock
market s big swings?
Then the investment
industry has something
it built just for you:
funds that hope to offer
a steadier ride. That sounds especially
comforting after this year s jarring start
for markets, in which drops of more
than one per cent have become typical.
But be careful, the funds carry their
These mutual funds and exchange-
traded funds own stocks that could
charitably be described as boring. Think
utilities, telecoms and other companies
whose profits---and thus stock prices---
don t fluctuate so much. The funds
avoid jack-rabbit stocks that tend to
have either really good or really bad
These funds advertise themselves by
including terms like "low volatility" or
something similar in their names, and
fund companies have rolled out dozens
of them in the last five years to meet
Older investors approaching retire-
ment or already retired are particularly
drawn to them. The ALPS Sector Low
Volatility ETF, which trades under the
symbol "SLOW," began trading in July,
The problem, for now at least, is that
the types of stocks these funds own
have uncertain outlooks. Many are at
risk of falling if interest rates rise, and
the expectation is for the Federal Reserve
to continue raising its benchmark rate.
And many have already been bid up to
heights that look pretty thrilling for
supposedly boring companies.
"You ve gotten to a point where
they re trading at higher valuations than
a market that s already expensive," says
Doug Ramsey, chief investment officer
at the Leuthold Group.
Six years ago, an index of the 100
least-volatile stocks in the S&P 500
was 13 per cent cheaper than the broad
index. But at the start of this year, it
was the mirror image. The S&P 500
Low Volatility index was 13 per cent
more expensive than the S&P 500.
If investors have already paid up for
the perceived safety that the low-
volatility index offers, Ramsey says, it
"may fail to live up to its moniker in
the weeks and months ahead."
Many low-volatility funds focus on
dividend-paying stocks, which tend to
have steadier returns. They ve grown
popular in recent years because investors
have been hungry for income at a time
of super-low interest rates.
The fear is that when rates rise,
income investors will go back to bonds
and dump their dividend-paying stocks.
"Everyone is investing in stocks that
look low risk based on history," says
Jim Fallon, who runs low-volatility
mutual funds at MFS Investment Man-
agement. "That leads to a lot of crowd-
ing in this space. Everyone is buying
the same stocks."
For example, Procter & Gamble has
been a relatively steady stock in part
because investors think people will con-
tinue buying Bounty paper towels and
Pampers diapers even if the economy
falls into a recession. But that has made
it popular---maybe too popular. Its
shares are trading at nearly 30 times
their earnings per share, close to the
highest level in 13 years. The S&P 500
as a whole trades at 16 times earnings.
That s why Fallon is considering
stocks that rival low-volatility funds
may not be.
For example, many funds invest in
only the 10 or 20 per cent of stocks
that have had the mildest price swings
in the S&P 500 or another index over
a certain time period. At his MFS Low
Volatility Equity fund, Fallon considers
any stock as long as it s in the bottom
60 per cent of the 1,000 largest US
stocks in terms of volatility.
The biggest catch in low-volatility
investing, Fallon says, lies in the time
commitment that it requires. He wants
his funds to lose less when the market
is tumbling, but they will also tend to
rise less when stocks are doing well.
So anyone who gets frustrated by slow
gains during the good times and jumps
out would miss out on the protection
offered during the bad times.
"You have to be patient and disci-
plined," he says. "You can t put it in
and pull it out if you re disappointed
after a year."
AP's STAN CHOE
offer to tame
at a price
Specialist John McNierney, centre, works at his post on the floor of the New York Stock Exchange, Tuesday,
January 12, 2016. US stocks are opening higher, led by gains in big technology companies, which have had a
rough start to the year. (AP)
funds focus on
tend to have
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