The sustainable investor for a changing world

Portfolio perspectives | Article - 2 Min

Exploiting the low volatility anomaly in practice

The low volatility anomaly, first reported on 50 years ago, can be implemented across asset classes, sectors and regions. As an example, Raul Leote de Carvalho presents an equity investment strategy that takes advantage of the fact that the anomaly can be observed in every single sector of activity.[1]

Launched in early 2011, this strategy[2] was designed to deliver returns in line with the market capitalisation weighted benchmark over the long term, but with lower volatility. It aimed to generate a higher Sharpe ratio than the index by investing in some 100 of the least volatile stocks from all sectors. The selection is revisited every month and relies on a portfolio construction approach that aims at keeping the risk relative to the market index under control.

Between inception and November 2022, the strategy matched the annualised gross return of the MSCI World index with lower volatility. It typically did better than the MSCI World in prolonged poor markets, as shown in exhibit 1. In our view, this has helped investors protect the value of their portfolios when it was most needed.

In our recent paper “The Low Volatility Anomaly in Equity Sectors: 10 years later!” we showed how the anomaly could be verified in sectors since 2011. It helps explain why the strategy performed in line with our expectations.

Sustainability added

The only change to the strategy since inception was the introduction in 2019 of constraints on the environmental, social and governance (ESG) performance of companies that it can invest in. We also added constraints to avoid investing in companies with the highest carbon emissions intensity.

This has not affected its performance significantly because we found that stocks with the highest ESG performance also tend to be stocks with a low volatility.

What you should take away

Over the past five decades, the low volatility anomaly in equity markets has not disappeared even in the face of growing debate and further research.

We expect the anomaly to remain a useful approach to investing in equities that targets similar returns to those of market cap weighted benchmarks, but with lower volatility. We believe it can outperform in particular in bear markets, while giving up only some of the upside in the strongest bull markets. That would make such an approach particular suited to more risk-averse investors.

BNP Paribas Asset Management has been a leader in factor-investing solutions — including low-volatility investing — since 2009, helping investors to diversify portfolios. Our low-volatility strategies aim to enhance risk-adjusted returns relative to traditional market cap indices by systematically exploiting low-volatility alpha and mitigating investment risks over the long term.

In addition, our quantitative investment team has these two objectives:  

  • Increase the portfolio’s score on ESG criteria relative to the ESG enhanced index (the benchmark minus 20% of stocks with the worst ESG scores)
  • Reduce the carbon footprint of portfolios by 50% relative to that of the benchmark.  


1 Also read Evidence of the low volatility anomaly and The low volatility anomaly – Still going strong after 50 years   

2 Parvest Equity World Low Volatility, launched in March 2011, became BNP Paribas Sustainable Global Low Vol Equity effective September 2019. For illustrative purposes only. Past performance is no guarantee of future performance. 


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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