Institutional money managers and a few retail funds have created low volatility portfolios because they know investors will accept lower profits for greater safety, but
Morningstar's Rekenthaler says these portfolios have their flaws.
1) Lower volatility does not lead to decreased performance, he writes. US equity funds with average standard deviations show best aggregate gains, while those with lowest and highest risk land at bottom. With funds owning foreign equities the effect is more in favor of low-risk funds as they have the best performance.
Rekenthaler says you have to look at risk too. Using ECVaR--excess conditional value-at-risk-- mutual funds line up according to standard investment theory.
2) Rate sensitivity is another issue. Stocks that register low volatility could share something else in common, and if that something runs into trouble, so will the low volatility stocks. 
Edited by:
Casey Quinlan
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