In 2020, equity strategies that sought to provide downside protection through exposure to low-volatility portfolios generally suffered one of their worst years, relative to the cap-weighted index, since 1999. Particularly concerning for many investors in these strategies was the lack of downside protection many low-volatility indices provided during the period of the market’s largest drawdown, from 20 February 2020 through 23 March 2020. Despite the average underperformance of low-volatility strategies, 2020 also resulted in a large dispersion of results across low-volatility managers within the broader style. This increased dispersion compounded the disappointment for many asset owners, as some of the more popular low-volatility strategies underperformed the low-volatility style benchmarks by relatively large margins. In this paper, we would like to make two short, but important, observations about the performance dynamics of low-volatility strategies in 2020, and share our expectations for the performance of this investment style going forward.
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