UTI MF has launched an index fund based on smart beta strategy of low-volatility investing. UTI S&P BSE Low Volatility Index Fund, whose new fund offer period closes February 25, is an open-ended scheme tracking the S&P BSE Low Volatility Total Return Index (TRI). The low vol. passive product space is slowly picking up pace, as investors brace for volatility after a sustained bull market phase, and eye stock portfolios that exhibit less performance swings. The existing products in this segment are ICICI Pru Alpha Low Vol 30 ETF and FOF and ICICI Pru Nifty Low Vol 30 ETF & FOF.

Living with volatility

Price fluctuation is a common phenomena across asset classes including fixed income, commodities and real estate. However, they are most highlighted in equities. These fluctuations i.e upward and downward movements in price are known as volatility in market parlance. While investors usually understand the concepts of

returns in an investment portfolio because of the return-dominant coverage, many do not fully understand the element of volatility associated with those returns.

In this backdrop, low-volatility investing aims to provide better risk adjusted returns over time with less volatility i.e. a relatively smoother ride. The premise is that companies with stable business models are generally less susceptible to recessions and other macroeconomic events.

Also, it is seen that low-volatility stocks, generally, tend to hold up better when markets decline rapidly, but the flipside is that they may lag during strong market rallies.

The S&P BSE Low Volatility Index, launched in Dec-2015, tracks the performance of the stocks of 30 companies in the S&P BSE LargeMidCap index with lowest volatilities, as measured by standard deviation (SD). So, selection of stocks is based on annualised volatility of stock's daily price return over last 252 trading days. The index is rebalanced semi-annually (March and September). The maximum weight of a stock in S&P BSE Low Volatility Index is capped at 5 per cent. At present, Low Volatility index has 63 per cent in largecaps, 28 per cent in midcaps and 9 per cent in smallcaps. The largecap allocation is higher when compared to the large & midcap actively managed fund category.

As per UTI MF presentation, the top 10 holdings of S&P BSE Low Volatility index are Gillette India, Maruti Suzuki India, Pidilite Industries, Infosys, Nestle India, Dabur India, Britannia Industries, GlaxoSmithKline Pharmaceuticals, ITC and SBI Life Insurance. S&P BSE Low Volatility Index at present has a diversified exposure at stock level with allocation to top-10 stocks at 38.2 per cent compared to S&P BSE LargeMidcap where the weight of top-10 stocks is nearly 44 per cent.

Delving deeper into index composition, S&P BSE Low Volatility has higher exposure than S&P BSE LargeMidcap to sectors such as Consumer Goods, Automobiles, Pharma etc. S&P BSE Low Volatility has lower exposure to sectors with higher volatility such as Financial Services, IT and Oil and Gas. It has no exposure to sectors such as Metals, Cement, Construction, Power and Telecom.

Performance

Given that S&P BSE Low Volatility draws its constituents from S&P BSE LargeMidcap, it is only fair to compare both indices in terms of performance. In terms of annualised point-to-point returns, S&P BSE Low Volatility has lagged S&P BSE LargeMidcap TRI in 1- and 3- year periods, while being neck and neck in the 5 year period. In the last 6 calendar and 5 financial years (FY), S&P BSE Low Volatility has out-performed S&P BSE LargeMidcap twice each.

Importantly, S&P BSE Low Volatility has beaten the benchmark LargeMicap index comprehensively when you measure in terms of annualised risk taken. Naturally, the risk-adjusted returns of the low vol. index is better than the benchmark in 3- and 5-year periods, as well as in 4 of 6 FYs.

True to its purpose, S&P BSE Low Volatility has offered more downside protection (lower drawdowns) during rough patches such as Global Financial Crisis (down 35.1 per cent vs. 49.5 per cent), Eurozone Debt Crisis (down 8.5 per cent vs. 17.2 per cent), volatile period of LTCG on equities (down 3.8 per cent vs. 7.7 per cent) and Covid-19 pandemic (down 27.5 per cent versus 37.2 per cent). But, do note it has also lagged during subsequent rallies such as post Covid-19 recovery (up 44.2 per cent vs. 59.1 per cent). This is a trade-off investors have to accept.

In terms of 3-year rolling returns, S&P BSE Low Volatility has generated positive returns for 99 per cent of instances compared to 95 per cent for S&P BSE LargeMidcap. Importantly, Low Volatility index has generated over 8 per cent return 92 per cent times compared to 70 per cent for LargeMidCap. The trend is intact when you look at 5-year rolling returns too. All the while, the SD of Low Volatility index is lower.

Most of the low. vol. passive peers have been launched between Aug-2020 and Sep-2021. The notable exception is ICICI Pru Nifty Low Vol 30 ETF, launched in Jul-2017, which tracks the Nifty 100 Low Volatility 30 index (largecap universe). Note that S&P BSE Low Volatility TRI lags returns of Nifty 100 Low Volatility 30 TRI in both 1- and 3-year periods, but scores better on annualised risk taken.

Investors should monitor the fund management fee of the new index fund. The inflows and outflows, due to open-ended nature, will also determine benefit given the extent of tracking error. Investors looking to take exposure in relatively stable companies with low volatility can consider this fund, but be ready to moderate their return expectations if markets rally from here on.