Opinion – Grain in Grain: When stocks are more volatile, one strategy stands out

The Ibovespa showed a surprisingly outstanding appreciation of most markets in the world. However, this performance was concentrated in just a few stocks. And this phenomenon occurred due to an extraordinary influx of foreign investors in the country. Interestingly, this flow was reversed in April and the Ibovespa has already dropped 4.4% since its peak on the first day of the month. Certainly, this year promises to have a lot of volatility and in a market like this, the minimum volatility strategy stands out.

The chart below shows the evolution of an investment of R$100 in the Ibovespa (orange line) and in the IVBX2 index (bank line). The IVBX2 index is built from the Ibovespa, excluding the 10 largest shares from it. Therefore, these 10 largest stocks account for a good part of the appreciation of the Ibovespa.

This also explains the performance of several managers in the year.

Investing in stocks can follow several strategies. Most managers follow the strategy called Value, popularly known by its English name, Value Investing. This strategy is defined by the purchase of cheap companies, that is, with a negotiated price below their intrinsic value.

It seems obvious that this should be the best strategy. However, it does not outperform the market at all times. In fact, no strategy is always good. For every market situation, one strategy stands out from the others.

Thus, factor-based quantitative funds can stand out in relation to funds that follow the well-known Value Investingif your models adequately identify the market type.

But which market should we experience?

There is no shortage of uncertainties to haunt markets this year and cause greater volatility. There is the war in Ukraine that is surprising for its extension, the inflation scenario around the world is out of control and there is also the prospect of higher interest rate hikes than expected around the world. In Brazil, the situation is no different and here we add the electoral environment that is rich in producing uncertainties.

Considering that the market should have higher volatility, the minimum volatility strategy may be appropriate for those who wish to have some exposure to the market.

The minimum volatility strategy, as the name implies, favors companies that have less volatility over returns.

This year, this strategy has stood out in relation to the Value Investing. The chart below shows the investment of R$100 in the year in the banking line in the minimum volatility strategy (banking line) and in the value strategy (orange line).

To measure the result of an investment, we cannot just use the return, but we also need to consider the risk. For this, the Sharpe ratio is usually used, which measures the return per unit of risk.

As it is a strategy that is defined by having less dispersion of returns, it presented a better Sharpe than the broad index when using the MSCI indices.

Therefore, if you also believe that this year may be more volatile, this minimum volatility strategy or a quantitative factor-based fund may be more appropriate for exposing yourself to the stock market.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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