Mr. Batek, CFA, is director of research and senior portfolio manager at Hillsdale Investment Management Inc. in Toronto.
What are we looking for?
Canadian stocks with the lowest volatility.
These stocks have more to offer than just less turbulence. Academic research in the 1990s showed a surprising anomaly: A portfolio of low volatility stocks – the classic Steady Eddies of the market – tends to beat standard market indexes when evaluated on the basis of risk to reward.
This finding contradicted the notion that taking on higher risk results in better returns, and cast a new light on equities that might have once been dismissed as too boring or conventional.
Institutional investors now use low volatility strategies as a means to capture the “equity return premium” – the excess return that stocks deliver over risk-free investments – with less volatility than buying a market index. For individual investors, investing in low volatility stocks is one way to tiptoe back into stocks with greater peace of mind.
How we did it
There are several ways to measure volatility, but I employed the classic definition of risk, measuring it by the standard deviation of daily returns. Standard deviation is a statistical measure of how much fluctuation is typical in a set of data.
The accompanying table shows the 20 stocks on the S&P/TSX composite index with the lowest volatility.
What we found
The low volatility equities consist mostly of large cap stocks, including several banks, real estate investment trusts and telecommunication companies. Utilizing S&P Capital IQ data to look further into the fundamentals of these companies reveals that most trade at reasonable price-earnings ratios with dividend yields that are significantly higher than the market norm.
Will buying low volatility stocks help your returns? At Hillsdale, our Canadian Equity Composite Minimum Risk Strategy, which targets the 100 lowest volatility stocks in the S&P/TSX composite index, has returned an average 17 per cent a year since it was launched Oct. 1, 2011, outpacing the 9.6 per cent annualized return of the S&P/TSX Composite Total Return Index with only half the volatility.
Past performance, of course, is no guarantee of future results. However, the combination of academic research and real world results suggests that investors may want to consider adding more low volatility stocks to their portfolios. As always, you should do your own research before investing in any of the stocks listed here.
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Low volatility TSX-listed stocks
|1||Bank of Montreal||BMO-T||41,125|
* trailing P/E (last 12 months) Source: S&P Capital IQ
|1||Bank of Montreal||BMO-T||41,125||10.4||10.4||4.7|
|16||Shoppers Drug Mart||SC-T||8,984||14.0||15.2||2.6|
|20||Cdn National Railway||CNR-T||41,991||15.2||16.1||1.7|