Pim van Vliet: The Volatility Effect, Revisited | Rational Reminder 264

Pim van Vliet is on a mission to put the low volatility factor on the map. In his role as Head of Conservative Equities and Chief Quantitative Strategist at Robeco, he focuses on leveraging the effect of low-risk investing. Pim has also published a book, High Returns From Low Risk: A Remarkable Stock Market Paradox, where he unpacks some of the key aspects that guide his work and underpin his success. During this conversation, Pim shares his insights on volatility, the changing market, and combining low-risk with other traditional factors. He equips listeners with key considerations for evaluating strategies or products when allocating low-risk and offers his perspective on out-of-sample-testing, distinguishing between global-factor and cross-sectional premiums, and more. Listeners will get Pim’s perspective on the pros and cons of the Sharpe ratio, and we examine risk-adjusted returns on long and short legs before hearing his Fama-French Five Factor Model analysis. We touch on inflation and gold, and finally, Pim shares his inspiring perspective on success in his financial and personal life. Tune in today to hear more!

Timestamps:
0:00:00 Intro
0:05:44 Pim defines the low-risk effect
0:07:24 How the magnitude of the low-risk premium compares to other equity premiums
0:10:57 How pervasive the low-risk effect is in asset classes other than stocks
0:14:26 How a low-risk portfolio performs relative to the market in up and down periods
0:16:17 The theoretical explanations for the low-risk effect
0:24:55 Pim explains whether or not it make senses to combine low-risk with other known factors in a portfolio
0:29:21 What an investor should they consider in evaluating strategies and products when allocating to low-risk
0:31:27 How Pim assembled the data set for his paper looking at the cross section of returns from 1866 to 1926
0:39:32 What Pim learned from his sample about the economic explanations for factor premiums
0:42:00 Pim describes the difference between a global factor premium and the cross sectional premiums
0:44:35 Pim describes how confident investors should be that factors are a “real” thing
0:50:50 Describing whether the long leg or short leg tends to offer better risk-adjusted returns
0:53:21 Pim's concerns with Fama and French’s Five-Factor model
0:59:35 Pim defines inflation regimes mentioned in one of his papers
1:01:43 The worst economic environment for investors
1:04:27 The downsides of getting downside protection from gold
1:07:59 Pim defines success in his life

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[michaelabbott]

Brilliant discussion! I've been following Pim's research for a number of years and great to see how much ground got covered here in simple easy to understand language. Well done guys!

[paulumz]

Thanks a lot for returning to the "red meat". Really insightful interview.

[misterr]

Great discussion and Pim van Vliet is awesome at explaining a lot of conceps in a easy manner. I highly recommend his book.

[georgezuwala]

Excellent all calm thinkers. With realistic thinking. Thanks for bringing out people like Pim for people like myself who would of never heard of him before. Keep up the great work guys this is time well spent.

[kevanotrades]

I love these highly technical discussions! Lots of information to take in and I'm looking put it to good use.

[rudi]

Thank you for this insightful discussion!

[paolovita]

This a very compelling case for low-risk equities. But looking at the rising valuation multiples (and premium over the broad market) of defensive sectors like consumer staples over the past decades, I have a question: is there a point at which conservative stocks become too expensive, and cyclicals are cheap enough?

[me]

My MO is building a baseline allocation in low-risk assets. I only give myself the freedom to invest in riskier assets when I feel like I have sizeable insurance in the form of highly stable assets. My philosophy is zero-sum risk in life. If I'm going to be doing risky things in my one aspect of my life, I take away risk from another. More risk in my career, less risk in my portfolio, for example.

[amandasmith]

I think I will read everything he has written

[ericfang]

When they are mentioning data mining as a concern, what exactly does that mean? Can someone explain it to me?

[freedomlife]

Risk is just part of life, you can be hit by lighting, car, tree or just drive by driver thrown something out of window. If we insure everything to reduce the risk to 0, then life will become very costly and unbearable.