By David Bakkegaard Karsbøl, CIO at Selected Group

In the stock market, there are several investment strategies, also called factors, and some are more supported by empirical evidence than others. The academic world has identified several factors that can be expected to provide excess returns in the long term if you invest broadly and establish portfolios of stocks that share certain characteristics.

Probably the most well-known is the value factor, which means buying stocks when they are cheap relative to their earnings and/or equity. The Momentum factor refers to establishing portfolios of stocks that have already outperformed the rest of the market and continuously adjusting the portfolio to sell weak stocks and maintain exposure to the Momentum factor.

Academic studies also support the Quality factor, the Small-Cap factor and the Growth factor to varying degrees. There is some disagreement as to whether these actually deliver a risk-adjusted excess return relative to the broad market.

However, there is no doubt that the investment strategies exist and actually constitute an investable sub-segment of the market with its own "life" and "return drivers".

However, one factor stands out from the others in several ways. Minimum Volatility (Minimum Volatility) stocks are a curious concept because investing in stocks with low volatility (i.e. less fluctuation) would generally be expected to provide lower returns due to the lower risk.

These are typically stocks in the utilities, healthcare, insurance and consumer staples segments, all of which are characterized by more stable earnings than the rest of the market.

The striking conclusion from numerous studies is that the Minimum Volalitity factor by far delivers the same return as the broad stock market - but at a significantly lower risk. What's more, most studies show that the risk-adjusted excess return is remarkably stable over long periods of time, but that most of the excess return is established in down markets.

However, this is not the only way in which the Minimum Volatility factor differs. The factor is much more dependent on the macroeconomic environment than the other factors.

Not only is the Minimum Volatility factor significantly more defensive and performs significantly better when the stock market is falling (like in the first half of 2022), it also performs significantly better when interest rates, inflation and leading indicators are falling (i.e. when there is a slowdown in the economy).

Right now, we have most likely seen a peak in inflation and interest rates have also stopped rising. In addition, the leading indicators (also known as Composite Leading Indicators) for the OECD area continue to fall.

If, at the same time, we are facing a peak in the real estate market and a turnaround in the labor market (higher unemployment), it is hard to imagine a more perfect macroeconomic environment for the factor over the next six months.