Pim van Vliet & Jan de Koning – High Returns from Low Risk, a Stock Market Paradox

Dutch fund manager Pim van Vliet has recently published, together with investment specialist Jan de Koning, a new book on the merits of investing in so-called ‘low risk’ stocks (High Returns from Low Risk: A Remarkable Stock Market Paradox). Van Vliet, who manages 18 billion Euros in low-risk equities at Rotterdam based Robeco, claims that investors are paradoxically better off by ignoring high risk stocks and instead focus on selecting low-risk stocks, which generate steady income and have good momentum. Vincent Abrams spoke with Pim van Vliet about this new book and the implications it has for investors.

Stating that low risk stocks offer better returns than high risk stocks is quite a bold statement. Don’t you meet a lot of skepticism when you bring this paradox to investors’ attention?

Yes, and I completely understand that initial reaction. When I stumbled upon this investment paradox myself many years ago I was also quite skeptical because it basically turned one of the basic premises of investing upside down. Literally it meant that the classic theory on risk and return in investing – that I learned as a finance student – just wasn’t confirmed by empirical evidence. So if investors are puzzled when I show them the real relation between risk and return (editor: which appears to be flat or even negative), I understand them very well. I was puzzled as well. However, the facts, not only brought forward by me but also other academics all point into the same direction: low risk beats high risk when investing.

Why did you decide to write the book? You could have also kept this idea for your clients and yourself? 

I could have done that indeed, however I sincerely believe that I can help small, big or very professional investors by showing them the remarkable effects of low risk investing. In fact, I have never kept the benefits of low-risk investing just for my clients or myself. To the contrary, I have published – together with colleagues – many academic papers on this subject. However, my co-author Jan de Koning pointed out that to reach out to a big audience of investors we had to publish this easy-read on low-risk investing.

In the book you demonstrate how investing in low-risk US stocks results in a significant wealth accumulation. Have you considered showing what the effect would have been if one would invest in a portfolio or global or only local stocks?

Yes, we’ve considered that but we choose to show the effects of investing in low-risk US stocks because of the availability of deep historical and high quality stock market data for this market. We test our strategy by travelling back in time to 1929 and demonstrate what kind of wealth would have been created when one had invested in low risk stocks in 1929. The low-risk effect however is known to exist also outside US stock markets for global as well as local markets. In fact, I demonstrated with a fellow researcher at Robeco, David Blitz, an award-winning academic paper that proved that this effect was also visible in Europe, Japan, followed by study for 30 different Emerging Markets. And others have documented the effect also for specific markets like UK or Spanish stocks. In the book we even demonstrate how every investor can build his low-risk portfolio for his or her preferred country given free at charge web-based software.

If low-risk investing yields attractive returns, why is the majority of investors not investing according to this principle?

Well, investors have to be aware of this empirically proven paradox of low risk stocks beating the high risk stocks. You have to be aware that the tortoise beats the hare when it comes to investing. Among professional investors the concept is not as wide known as an investment style like value investing is, because at universities and in finance classes people are not being educated about this concept. So if not a lot of professional investors are aware of this paradox, you can imagine that most non-professional investors don’t know the concept either! And that’s a pity, because non-professional investors are in the best position to profit from this insight.

Why is that?

Professional investors are constrained by their yardsticks: benchmarks. You see: if you are such a professional, you have to outperform the market every quarter or year. If you don’t, you may lose your client. For these investors, low-risk stocks are – believe it or not – risky in themselves because the pattern of returns of these stocks can deviate quite a lot from the return of the average stock. Think of it: when stocks go down during a bear-market, low risk stocks lose less than the benchmark. A great situation for every investor who needs to outperform a benchmark. However, once markets show very strong gains – a steep bull market – these low risk stocks may lag the market. In other words: a professional investor runs the risk of underperforming and that might be risky from a career perspective. Despite the fact that over the course of a full market cycle you probably will finish ahead of the market due to the capital preservation in a bear market. This is why non-professional investors are in the best position to reap the rewards of this investment style: they are not constrained by the need to outperform every month or quarter, most of them just seek low risk and high income out of their investments and that is what this strategy is offering.

The rest of this interview will be published in full at a later date.