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Bailey McCann, Opalesque New York:

Smart beta products have been one of the most popular product categories over the past few years. Within that group, low-volatility products are growing the fastest, however, a new white paper from Lazard's Equity Advantage team argues that investors with allocations to these low-vol products might find themselves with more risk than they bargained for.

"For months, we have pointed out that we believed the design of the MSCI Minimum Volatility indices left investors with significant stock-specific risk and concentrations. We specifically feared that there could be a reversal from the extraordinary returns over the past few years, leaving investors potentially disappointed if market leadership shifted away from more traditional low volatility stocks and sectors," writes Paul Moghtader, Managing Director and Portfolio Manager/Analyst on Lazard Asset Management's Equity Advantage team in the paper.

According to Moghtader, if investors want low-volatility exposures they may be better served to take a more quantitative view that isn't solely reliant on backtesting and instead has a rules-based stock selection process as part of a low-risk strategy. "In our Managed Volatility strategy, we take a rankings based approach that uses a combination of factors for how stocks are included," he says. "Some factors are backward looking like historical volatility, but others are more forward looking indicators like current leverage." Mog......................

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