TAMARA: So good afternoon, everyone, and welcome to this webinar, "De-Risking Portfolios with Low Volatility Equities." Thanks for joining us. My name is Tamara Owchar, and I'm the Vice President, Director, Client Portfolio Manager for the Quantitative Investments team here at TD Asset Management.
So we have a great topic for discussion today. And we're going to be joined by Julien Palardy, Managing Director and Head of Quantitative and Passive Investing, and Jean-Francois Fortin, Vice President, Research and Development, Quantitative Investment Strategies and Risk Models. Very much so a mouthful.
But before we get into the meat and guts of our conversation with Julien and Jean-Francois, I want to set the stage. And let's do a quick review of what the market environment has been this year and specifically how it's impacted low volatility as a style factor.
So the market environment this year can probably be characterized as a risk-on rallying market, which, quite frankly, is completely opposite of what we witnessed in 2022. So this type of environment is a very challenging one for low volatility strategies. Low volatility strategies are designed to take advantage of that low volatility anomaly and they're constructed to have less risk than that of a cap-weighted benchmark without sacrificing those long-term returns.
So as a result of this preference towards those less risky and more defensive equities, these types of strategies will lag in strong upward moving markets, like we've witnessed this year, and lag even more so when those markets are fueled by increased risk taking. So Julien and I will get into this in a little bit more detail as we go through this webinar today, but the low volatility style factor is one of the most challenged style factors so far in 2023.
So markets did take a breather from their strong upward trajectory and they retrenched in August and September, and most major indices were down in the third quarter. So what does that mean for the low volatility factor? Well, the low volatility factor rebounded in August, September, and October, as that global economic weakness and central bank messaging of higher for longer interest rates began to be reflected in the markets.
So now we're into November, so almost the end of the year. But November is shaping up to be similar to the first half of the year, as the Fed's recent communication on rate increases has acted as a positive signal to the equity market once again, flipping that switch back to risk-on.
So the strong performance in cap-weighted indices this year is a story of high concentration, and we'll talk a little bit more about that as well. So 2/3 of the return of the MSCI World Index can be attributed to the Magnificent Seven, so the NVIDIAs, Apples, Microsofts, Metas, Amazon, Teslas, and Alphabet. So most of these companies, except for Microsoft, can not only be called the Magnificent Seven, but they're also the Volatile Seven.
So when we're looking at these names through a volatility lens, within the spectrum of volatility these names are higher on a relative basis. And so therefore, low volatility strategies will tend to shy away and have minimal exposure to these. And what's going on with us now, in 2023, is this is putting low volatility investment strategies as a disadvantage in this type of market.
So now that I've set the stage and talked a little bit about what's been going on so far this year, let's dive deeper into markets and look at them through a volatility lens. And let's talk to Julien and then bring JF into the conversation as we talk about diversification and his recent publication, "De-Risking Portfolios with Low Volatility Equities."
So before we get into the good stuff and you stop listening to me talk, we're just going to do a little bit more housekeeping. So again, if you have any questions at any point in time during the discussion, please let us know. You can drop them in at the bottom right of your screen. And if we can't get to these questions [INAUDIBLE], we will be more than happy to circle back with you after. OK. So let's begin.
So Julien, this year so far has been very challenging for many equity styles and low volatility is honestly no exception. So after what we saw in 2022, the low volatility factor has struggled for most of 2023. So how does this year's performance of the low volatility factor stack up to your expectations?
JULIEN: Thanks, Tamara. So I think your intro actually was quite precise when it comes to how low vol did versus expectations and some of the why as well. Clearly, we were below expectations, not only in terms of performance versus the market, but even if you think about the type of upside capture that you would want in an up market, even a strong up market like we've seen this year, obviously we're way below that.
And in fact, low vol is not the only investment style that's like this. A lot of active managers are struggling because of the concentrated market rally, as you mentioned. So think about value managers, smaller cap managers would have suffered. In fact, everything that is not large cap growth this year would be typically way behind the cap-weighted index.
And the main reason, as you mentioned, it's not only a low vol phenomenon. It's literally an increase in market concentration. So any type of active manager that builds their portfolio far away from the benchmark, or benchmark agnostic, would have suffered the same kind of fate, where probably most of them wouldn't have found this handful of stocks that really did well so far this year.
And as a consequence, what we see with low vol is not entirely unexpected. Even though we're below expectations based on long-term upside capture numbers that we've empirically observed, when you look at periods of increased market concentration like we see this year, those numbers are not entirely unexpected.
And we've seen episodes like this before. 2020 was another example of increased market concentration. We've seen this in the late '90s. In fact, towards the, let's say the second half of maybe 2010 or 2012 to 2020, it was actually a period where we saw some degree of increased concentration in the market. And you can see the upside/downside capture ratios of low vol not being as strong as what we had seen between 2000 and 2010.
And despite this fact, despite the fact that we've seen historically episodes like these, it doesn't change the long-term empirical evidence in favor of low vol investing. There's going to be periods where your upside capture or even your downside capture are not going to be as nice as they've been in the long run. But despite this, and despite those episodes of increased market concentration, on a risk-adjusted basis, low vol is still doing much better than the market in the long run.
TAMARA: OK. So are you saying that-- what can you say about the effectiveness of low vol? Is the low volatility factor just less effective than it has been historically? Or what are your thoughts on that?
JULIEN: Yeah. No, I wouldn't say this. I think it's actually a mistake to judge the effectiveness of low vol and the existence of the low vol anomaly based on recent performance. People should probably, in fact, do the opposite. Just because something didn't deliver strong upside capture or even low downside capture over a recent period of time doesn't mean low vol stopped working.
This is very comparable to walking for a mile and you feel the Earth is flat. But actually, it doesn't matter how long you're going to walk, the Earth is not flat. This is a fact. And you're not going to be able to reverse this through observing a few data points, let's say.
So to assess the low volatility, you need to look at the whole distribution. And what we know from the long-term empirical evidence is that the distribution of low vol returns tend to have a similar mean as the rest of the market and the more volatile stocks, but a much narrower dispersion than the rest of the market.
And as a consequence, if you stick with low vol investing, you do end up with a higher risk-adjusted return typically. But to realize this, you need to stay invested. So you cannot just decide to move in and out based on what low vol did recently versus the market.
And actually, we have a page, on page 2, where we see the long-term empirical evidence based on Sharpe ratio of low vol versus the market. This is the differential Sharpe ratio between low vol and the cap-weighted index over 35 years. Even though we only see 25 years here, this is a trailing 10-year number. So we actually cover 35 years of data.
And there's been only very few episodes where over trailing 10-year period, you ended up with a better Sharpe ratio with the market than with low vol. And these would be towards the end of the '90s, where we've seen a significant risk-on rally as well, concentrated rally just like what we're seeing today, most basically towards the last few years of the '90s. And this culminated in the tech bubble, as we know it. And same thing in 2020. We saw the same kind of phenomenon.
So if you had been in a position of measuring the low vol Sharpe ratio versus the cap-weighted index at the end of the '90s, you could have seen a similar Sharpe ratio between the two. Doesn't mean that low vol doesn't work. You need to look at the bigger picture. And overall, if you look at this entire sample, there are very few periods. The vast majority of the time, you look at your risk-adjusted returns for low vol, you're going to be much better off. And this is the ultimate goal of low vol is to deliver better risk-adjusted returns than the market through risk reduction.
So from that perspective, I'm pretty sure that the next 10 years are going to be exactly the same as what we've seen historically over the last 35 years. And we could go back even further, because we have empirical evidence further back in the US where the numbers are essentially similar in terms of risk-adjusted returns versus the market.
TAMARA: OK. So then what you're saying here, so low volatility investing is a long-term strategy and we shouldn't be worried about what's happening in the short run. But from an investor standpoint of watching the market on a run can be a really hard pill to swallow for a low volatility investor. And so what is your advice, or what would you want to tell low volatility investors who worry about missing out when the benchmark's on a tear?
JULIEN: Yeah. I would say don't look at the market too much. Because at the end of the day, you need to pick this empirical distribution that you want to be exposed to. And you want the one that has high volatility and a strong upside in some circumstances, strong downside, or you want the narrower distribution of returns that gives you more peace of mind when you incur market volatility.
So if you decide to go with the one that has a narrower distribution, don't look at what would have happened if you would have taken more risk and, most basically, not over a short period of time. Markets are going to rally in some circumstances. But in some other circumstances, they're going to crash as well and you're going to be very happy. Like 2022, most clients were fairly happy to be in low vol as opposed to being in a market. And if you focus only on those so-called opportunities that you may have missed out on taking more risk, this probably will just lead you to being led in high risk traps that could result in high downside in the future.
So it all comes down to focusing on the big picture and the long-term empirical distribution of global returns, I would say, and leaving your emotions out of the equation. Try to base yourself on facts as opposed to what you're seeing recently. And feeling that you have left some of the rally on the table is probably not the best way to make investment decisions.
And in fact, the reason the low vol anomaly exists is that unfortunately, too many people out there follow their emotions when it comes to making investment decisions. And this is at the benefit of those who are actually much more rational and make their decisions based on long-term empirical evidence and actual facts.
TAMARA: Sounds good. Be rational. OK. So let's bring JF into this conversation talk. And let's talk a bit about your recent white paper. So "De-Risking Portfolios with Low Volatility Equities."
So let's begin with diversification. Diversification is sometimes considered the only free lunch in investing. So as we all witnessed in 2022, with the absence of negative correlations in stocks and bonds, that diversification failed us when we needed it most. So in times of crisis, all correlations go to 1.
So JF, can you talk to me a little bit about the role low volatility can play in portfolio diversification?
JEAN-FRANCOIS: Sure. Well, diversification is all about managing risk. And there are basically two ways you can go about this. A first way is to diversify across asset classes. So that's the whole idea behind the 60/40 portfolio, for example. So when equities go down, bonds go up and vice versa. But that relationship isn't always guaranteed. And when it goes away, so does much of that, let's say, diversification benefit. So asset class diversification is, of course, necessary, but it may not always be sufficient.
The other way is to diversify within your asset classes. And that's really where low vol shines. So it's less risky, obviously, by construction then other equity styles, but it also has lower correlation to other equity styles. And that is especially true on the downside, where you typically need most of that diversification.
TAMARA: Right. But wouldn't it just be better to diversify my portfolio across equity styles, like if we're going to talk about diversification? More things, better things, instead of just low volatility to lower the risk of my portfolio?
JEAN-FRANCOIS: So you might think so. But no, at the end of the day, equity styles are still equities. And unless you're wanting to go short, they're all very much correlated with each other. So typically we're talking in the 80-plus% range. So most of the risk reduction you get from combining different styles comes not from style diversification per se but simply from the low volatility of low vol.
So if you want to push the exercise further and lower your equity risk even more, the best way to do so is actually just to buy low vol.
So if we can move on page 3, Tamara, please. So we show the performance of the main equity styles across the six main crises of the past 25 years. And what we see is just how much low vol has helped in each episode. So low vol is actually the first bar in each of the six charts.
So like you said, low vol has helped in each episode much more so on average than any other equity style. So if you had, for example, average your equity exposure across styles, in any of these crises you would have made your downside capture much, much worse. And sometimes as much as three to four times worse.
TAMARA: OK. So if you take a look at this chart, low volatility doesn't always perform the best in all instances. So what are your thoughts on timing the low volatility factor? And so that's allocating more to low volatility when you perceive there's risk on the horizon.
JEAN-FRANCOIS: So there is no doubt that factor timing can add value if done right. But the if done right part is key. So we know that factor timing is notoriously difficult. So I mean, we know that factors behave differently in different markets, as you mentioned. But the hard part is figuring out what comes next. So knowing which style is best in which environment is only really useful if you can accurately forecast which market environment or which type of crisis will come next.
And unfortunately, that's way easier said than done. And if you don't have that kind of foresight or if you're a risk-averse investor or if you're just worried about long-term loss of capital, your best bet is simply to buy the style with the best average record. And by and large, that's low vol. And that's precisely what we see.
So we see it on this page, but it's even clearer on the next page, if you can go on page 4. So what we see is that this is the average performance across the six crises mentioned in the previous slide, so the six largest crises of the past three decades. And what we see is that the low vol factors was the place to be on average during these crises. So no factor timing needed.
TAMARA: So then, I think, going forward, I like to think of things as there will be another crisis, no matter what, as we continue on in our journey through life. Something else will happen, but we don't necessarily know what that something will be. Chances are if it looks like what we did in the past, something's gone wrong, right? So it's best just to get into low vol and, on average, you're going to outperform, or at least manage your risk appropriately.
OK. So now let's circle back to markets and talk more about concentration. So Julien, markets are undoubtedly getting more concentrated. And I talked a little bit about that at the beginning. But as market concentration increases and market risk increases, so does low volatility's active risk versus the cap-weighted benchmarks that investors are typically using as yardsticks. So strategies focused on absolute risk reduction begin to look less and less like they're concentrated benchmarks.
So I guess my question to you is, well, how much tracking error versus the cap-weighted benchmark is too much for a low volatility strategy? And why not just get closer and closer to that benchmark?
JULIEN: So I'd like to add that our tracking error increases but so is our risk reduction actually. And this is what people should be happy about. In periods where market volatility increases, low vol tends to do much better in terms of reducing risk versus a cap-weighted index.
And I wish there was a simple trade-off between tracking error and risk reduction. But unfortunately, to achieve this risk reduction you need to take tracking error. And typically, active managers that seek to beat the benchmark, they're going to limit themselves within a certain tracking error band, let's say 4%, 5%. And they're going to try to generate as much value added within this tracking error range or this active risk range.
And there's a good reason for this. Typically, there's a concave relationship between the value you can add as an active manager. Unless you start shorting stocks or taking leverage, you're going to start seeing, at the margin it's going to become much more difficult to add a few more basis points of value without taking a lot more tracking errors. So there's a clear concave relationship between active risk and value add.
But when it comes to risk reduction, you don't see this non-linear relationship as linear. Actually, it's fairly linear, your relationship, until you reach a point where it becomes physically impossible to reduce risk. And at this point, then, yeah, maybe you're going to decide between two equally risk-reducing portfolios. You may decide to pick the one that has the least tracking error. But it's going to take some time before you hit this at this point, or before you hit this wall where it's impossible-- physically impossible to reduce risk further.
So there's not as clear of a trade-off, let's say, or smooth trade-off between risk reduction and tracking error as there is when you try to beat the benchmark. For low vol, it's vastly different. So if you believe in the low vol anomaly and you believe that you shouldn't be taking risk unless you get paid for it, then limiting your tracking error is kind of going against this very belief.
And again, as long as you haven't pushed your risk reduction as much as you can, then it's not that clear to me that you should be constraining yourself artificially to prevent this risk reduction from happening.
TAMARA: So your goal is to focus solely on absolute risk reduction, right? So you talked a little bit about why not seek both absolute and active, but maybe you can expand on that a little bit.
JULIEN: Well, that would come down to a matter of preferences. Once we understand that this thing is linear, like you're not going to reduce your risk without taking additional tracking error, then it becomes like finding the point where it fits your preference as an investor. And you can imagine that various investors would have different preferences.
But at the end of the day, the goal of low vol is to really deliver the best possible risk-adjusted return. So unless taking less tracking error allows us to deliver that-- which is not really the case empirically. In fact, it's not the case at all, unless you look at specific market contexts-- we believe that investors should first focus on reducing the risk as much as possible so that they can extract the best possible risk-adjusted return.
In fact, our aspirational goal as low vol managers would be if we could deliver you a portfolio with market-like returns but zero volatility, and obviously like market-like tracking error or, in fact, market-like volatility being the tracking error. So let's call it 15% tracking error but 0% volatility, versus a portfolio that has 0% tracking error and market-like volatility, which would be 15%.
Which one would you pick as an investor? For me, it's very clear. I would pick the risk-free portfolio that gives me 8%. Because the risk-free rate is still at 5% or 5.5% out there. So at the end of the day, if you can give me 8% return yielding or returning portfolio with zero volatility, that's the portfolio I would pick.
And obviously, low vol cannot deliver this. But the aspirational goal of low vol is to get investors as closely as possible to this aspirational portfolio as we can. And from that perspective, there's no clear room for limiting tracking error if it prevents us from getting closer to this aspirational portfolio with as little risk as possible with market-like returns. So it's a question of trying to meet this goal as closely as possible.
TAMARA: Yeah. So having that market-like returns with a less bumpy ride is really the goal.
JULIEN: Yeah. Yeah, that's exactly it.
TAMARA: Yeah. OK, so let's switch back to diversification one more time here. And let's talk to JF again. So Jean-Francois, let's say I already have a portfolio that's diversified across different asset classes and I already manage my risk, less liquid alternative and infrastructure, why would I need any low volatility equities as opposed to other equity styles, or maybe just plain cap-weighted equities? So in my return seeking portfolio, why not-- or why wouldn't I just increase my bond allocation to lower my risk?
JEAN-FRANCOIS: So the short answer is opportunity cost. If you want to increase bonds to push down your risk, you can, obviously, but this will come at the cost of expected return. Or if you want to use more alternatives instead, this might come at the cost of liquidity. There's always some kind of trade-off.
But the reason why you want low vol in the first place is not just to lower risk. It's to lower risk and collect the equity risk premium. And a good example, I think, is on page 5. So on page 5, we show two efficient funds here. So the first one in green uses cap-weighted equities. The second one in blue uses low vol.
And the first thing we see is that both curves, while both are upward sloping, and that's because equities pay more than bonds. So that's your equity risk premium. The other thing we see is that over the long run, you're almost always better off with low vol. And part of the reason for that is that you get more of that premium per unit of risk. Another way to look at this is on the next page, if you can move to page 6, please.
So the first line in green is just your standard 60/40 portfolio, so 60% cap-weighted equities, 40% bonds. The second line in blue is a bond equity portfolio with low vol instead of cap-weighted equities. And that targets the same level of risk as the green portfolio. So basically both portfolios, or both lines, they have the same exposed risk, but we see that the long-term return of the one with low vol is much higher.
And the reason, again, is that for the same level of risk-- so in this example, it's about 8% annualized-- you get about 20% more low vol. So that's 20% more equities, and basically 20% more of your portfolio with a better expected return than bonds.
TAMARA: OK. So low volatility equities tend to have higher correlation to bonds. So is there a bond allocation at which low volatility equities don't offer as much risk reduction as cap-weighted equities because of this? What do you think, Jean-Francois?
JEAN-FRANCOIS: There is. Yes, there is, but it's fairly high. So that threshold, for example, in the example I just gave is about 90%. So that is unless you want to hold more than 90% of bonds in your portfolio, it's actually better to hold low vol to lower your overall risk. And the reason is that the risk reduction you get from the lower risk of low vol more than offsets the effect of the higher correlation to bonds.
Put differently, so yes, low vol stocks have a higher correlation to bonds, but their lower risk more than make up for that. And that's true even if you add alternatives to the mix.
If you move on page 7, for example, we show the optimal allocation that minimizes portfolio risk for different level of bonds and other alternatives. So you kind of have to zoom to see it well. But the level of bond allocation at which low vol doesn't offer as much risk reduction as other equity styles-- so other equity styles, including cap-weighted-- is, again, at around the 90% mark.
TAMARA: So you're looking at the very tippy top right-hand upper corner.
JEAN-FRANCOIS: Yes, exactly.
TAMARA: OK. So hypothetically, what if I'm a fully funded pension plan that follows Liability-Driven Investing, so an LDI program. And let's say that I am nearly entirely invested in bonds. Is there still a place in my portfolio for low volatility strategies?
JEAN-FRANCOIS: Absolutely. So, well, the way I see it, is that the assets that are used to match your liabilities shouldn't really be part of the risk allocation equation. Pension funds that have long-term bond-like liabilities should naturally invest more in bonds. So that's kind of obvious. But their excess capital should be allocated in line with their policy mix.
So it doesn't matter if it's excess capital or not or if these are return-seeking or risk-taking assets or not, the fact is-- and Julien made this point before-- is that you should always get paid as much as you can for the risks that you take. Or likewise, you should never take risks unless you get paid for it.
TAMARA: OK. Thanks, Jean-Francois. So let's switch gears just one more time before we finish off with our webinar. And as everyone knows, no conversation about markets right now can be had without talking about interest rates. So interest rates have increased rapidly over the past two years, reaching levels not seen in over two decades. Now with bills and bond yields hovering around 5%, more and more investors are turning to fixed income to lower their portfolio risk and generate income.
So how much of the underperformance of the low volatility style and of defensive sectors, like utilities and health care, are specifically due to the higher interest rates, and what other factors could be at play? Maybe Julien, you can take this question?
JULIEN: Yeah. So it depends on if we're talking about this year, last quarter, or the long-term. So long-term empirical evidence, we've done many of those studies because this question keeps coming back every time we see an increase in bond yields, more specifically, not short-term interest rate, but it's really all about the bond yields. And what we see is that over the long run, the biggest, the first biggest driver of the relative performance of low vol versus the market is obviously the market itself.
So when the market rallies, low vol tends to underperform. When the markets crash, low vol tends to do better than the market. And once you have this, controlling for the direction of bond yields not that helpful in understanding if you're going to outperform or underperform.
And this is just empirical evidence, statistical facts. Like we've looked at it on various periods. As long as it's a long enough period, interest rates don't seem to be that important. And there's a few reasons behind this. The first obvious one is that low vol is not always made of those more defensive sectors, or interest rate sensitive sectors, at the very least. So the weights that low vol is going to have on the various sectors will vary through time. It will be fairly adaptive.
Right now, our low vol portfolios tend to be fairly defensive. But historically, we've had periods where industrials or financials were the top sectors. And within those sectors, we were obviously going towards more defensive industries or names, like insurance companies or industrials are fairly large. So we can still manage risk fairly well within those sectors. Plenty of low vol names to pick from. But there's no such thing as a single low vol portfolio throughout market conditions. So when interest rate volatility increases, typically the low vol funds tend to adapt, or low vol strategies tend to adapt.
Now, on top of this, there's going to be what people think as being fairly interest rate sensitive sectors. For example, utilities may or may not always be the most interest rate sensitive sectors. So last year was a very good example of this. It depends on other factors. And so last year we saw a massive increase in bond yields and utilities actually did a pretty good job at defending against the market downside.
And the worst sector was, as you know, the tech sector, and growth names suffered a lot more than low vol names and than defensive sectors as well. And yet we saw a massive increase in bond yields. And same thing in 2020. We saw a massive drop in bond yields and it didn't help out the more defensive sectors at all, in fact.
And this year we're seeing a bit of the opposite, but there's clearly another phenomenon that plays a much, much bigger role than bond yields. And again, bond yields, it depends on the period that you look at, maybe last quarter but less so from the beginning of the year.
Market concentration plays a much, much more important role, both in the short-term, but when we look at long-term empirical evidence on top of the direction of the market, the amount of concentration or the change in concentration that we're seeing in the market plays a much bigger role to understand the relative performance of low vol versus the market than do interest rates. That's what we see from an empirical perspective, at the very least.
TAMARA: OK. So are low vol equities still superior to bonds in such a high interest rate environment? Maybe, Jean-Francois, did you want to take that?
JEAN-FRANCOIS: Sure. So the thing is that higher interest rates, they raise the bar for all asset classes and all equities, low vol or not. Naturally, it creates a more competitive environment for asset pricing. And the most expensive assets are typically the ones who feel the pressure first, as they should be. And that's not really the case for low vol right now, given the strong risk fueled rally that we've seen so far this year.
I would argue that low vol stocks are roughly in the same boat as more cyclical names right now, so they trade at vastly more attractive valuations than the rest of the market but they also come with vastly different risks. Cyclical stocks, for example, are trading at lower valuations while higher rates but also due to higher odds that the restrictive monetary cycle ends in a recession. Meanwhile, defensive stocks are much less subject to that recession risk.
It's true that right now is probably a once in a lifetime opportunity to get back into bonds at very good yields. But I would argue that this opportunity shouldn't come at the expense of your allocation to low vol but rather to your allocation to growth equities, which are trading at unjustifiably high valuations, given the current context.
TAMARA: Great. Thanks, Jean-Francois. So that brings us to the end of our planned questions. I see that I do have a couple of audience questions that I will pose to you guys right now.
So the first question I see-- and feel free to whoever wants to jump in, please do so. The first question is, are we seeing a repeat of 2020 or is this time different? How so?
JULIEN: Maybe I can take this one. So I intentionally planted or mentioned a few 2020 references before, because there are some similarities, but there are some differences as well. So one thing that happened in 2020 that we didn't see happen this year, fortunately, is this massive crash that we saw due to COVID and the Fed stepping in and injecting-- not only the Fed, in fact, governments as well, and central banks intervening to support the markets with massive stimulus packages and massive monetary stimulus as well that probably I'm not going to see again in my lifetime, hopefully.
So we saw this and the markets rebounded very drastically and very aggressively. And a lot of low vol managers, more specifically active low vol managers, got whipsawed in that process, so probably de-risked on the way down. And then many of them were actually low risk on the way up as a consequence.
So this pattern didn't happen this year, fortunately. But something that is very similar is this concentration phenomenon that I mentioned, that you mentioned as well, Tamara, that we saw in 2020. Back then, people remember well, it was a work-from-home phenomenon. So highly visible names that were rallying, more specifically Amazon, that benefited from this type of environment. Everybody thought back then that we would end up working from home forever. And look around me, it's obviously not working from home today. And that was the story back then.
Today, or this year, the story is a bit different. It's AI. And everybody is seeing ChatGPT and everybody is piling up on NVIDIA stocks. And to be honest, one probable similarity also between 2020 and the risk-on rally that we've seen in 2023 is that these are highly visible names traded a lot by retail traders also. So let's be honest, this handful of names, if we see a rally, such a concentrated rally, is because it's largely individuals buying individual names also, as opposed to entire styles or entire diversified portfolios.
We're still seeing, in fact, redemptions from equity funds, diversified equity funds, a bit like what we saw in 2020, despite the markets rallying. So same kind of phenomenon that we're seeing from that perspective. But again, coming back to what I said previously, we've seen this historically. We know how it ended up. And despite all those concentrated rallies that we've seen, it doesn't change the long-term empirical evidence in favor of low vol. This was part of the empirical evidence also.
TAMARA: OK. Thanks. So I see one more question from the Q&A. So what would it take for low volatility style-- so the low volatility style to outperform again? A market crash? Lower rates? The second coming? What can we expect going forward?
Does anybody want to attack that one?
JULIEN: I mean, I can do it. But I'd let JF take some as well, if he'd like to. It's up to him.
JEAN-FRANCOIS: Well, again, it's up to you. I can take it. I mean, OK, so we could discuss the conditions that could lead to outperformance. But the fact is that nobody really controls those conditions.
So the most important factor is the direction of the market. And if markets crash, we could certainly expect low vol to outperform. But it would be beyond me why people would actually want markets to crash. I hope nobody hopes for a crash. I actually want to see markets to keep rallying but low vol to keep doing what it does best, which is good upside capture at lower risk.
And, well, basically what I'm trying to say is that people should change how they look at things when they assess the success of low vol. So it has just never had anything to do with outperformance. Low vol is all about delivering better risk-adjusted returns. And this is what people should be focusing on. So in fact, it's about delivering better risk-adjusted returns than what you would expect from the market, not necessarily what markets actually delivered.
And the side effect of this is also about delivering better upside capture and less downside capture. So from that perspective, I think people should hope for a strong market rally but one where low vol captures 80% or 90% of this upside, so much more than they should hope for a market crash where low vol could deliver high downside.
JULIEN: Maybe to add to this-- again, coming back on this concentration phenomenon-- obviously, markets concentrating would allow low vol to probably gain back its properties. We've seen this in 2021, actually, after COVID, where the market started re-concentrating and we saw a quite significant upside capture. Even though we were lagging the markets, low vol had like 90% upside capture, which is fantastic, in my opinion.
And people shouldn't have been looking at this as low vol lagging the market. They should have been looking at this as low vol outperforming massively versus what you would expect in an up market. So again, I hear too often that people hope to see low vol outperform while, in fact, it's not part of the objective of low vol at all. In the long run, this is not what people should be hoping for. They should be hoping for, as JF said, better risk-adjusted returns and strong upside capture, low downside capture, those kinds of properties.
TAMARA: OK, thanks. So that brings us to the end of our time today. I want to thank you, Julien and Jean-Francois, for providing your insights on current market conditions, the low volatility factor, diversification, and the importance of absolute risk reduction.
So I'd also like to thank the audience for attending. And if you have any additional questions or would like more information on today's topic, please feel free to reach out to us or to your relationship manager and we will be more than happy to get back to you.
I'd also like to encourage you to let us know if there is a specific topic you would like to see in a future webinar. Thanks again for joining and have a wonderful rest of your day, and we'll see you guys all again soon.
JULIEN: Thanks.
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