Be on the look out for fraudulent investment scams.

CA-EN Institutional
CA-EN Institutional

Avoiding the ‘Lottery Ticket Effect’ with Low-Vol Investing

January 31, 2023
Share on facebook
Share on linkedin
Share on twitter
Share on email
Share on print

With a recession potentially around the corner, Chris Heakes, Head of Disciplined Equity, BMO Global Asset Management, examines opportunities in low-volatility investing for 2023—including the BMO AM Canadian Smart Alpha Equity Fund.

Looking back, equity investing almost seemed easy. For years, the “Great Moderation”—a term coined by economists to describe the prolonged period of stable inflation and low macroeconomic uncertainty beginning in the 1980s—created an attractive environment for investors, with the S&P 500 growing by double-digit percentage points almost every year.

2022 was not one of these years, however.

As institutional investors well know, last year was historically difficult for markets, presenting challenges that hadn’t been seen in several decades. From rapidly increasing interest rates and persistently high inflation to the geopolitical uncertainty ignited by Russia’s invasion of Ukraine, headwinds abounded. And it’s only logical to expect certain elements of that difficult market environment to spill over into 2023—and an inverted yield curve suggests a recession is likely on the horizon.

The low-volatility trend

Experienced portfolio managers take risks when prudent and adjust strategies when necessary. It’s no surprise, then, that in these turbulent times, low-volatility strategies have experienced a resurgence in interest, adding value for investors in a choppy year. Case in point: Canadian low-vol strategies. In 2022, because of pressures like inflation, interest rates, and the war in Ukraine, Energy outperformed. One might have expected Canadian low-vol, which tends to be underweight Energy relative to the broader Canadian market, to underperform as a result. But that didn’t happen. Instead, these strategies showed their value, with tactical stock selection and rigorous risk control overcoming Energy sector underweights.

BMO AM Canadian Smart Alpha Equity Fund performance in 2022

BMO AM Canadian Smart Alpha Equity Fund performance in 2022

Source: BMO Asset Management Inc., Bloomberg, date range from June 17, 2011 to December 31, 2022. Additional performance details below. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

As we enter 2023, there are some promising signs, including indications from central banks that they may be ready to take their foot off the gas pedal. But inflation has been relatively sticky, and balance sheets still need to be unwound, which means that quantitative tightening is still in the offing. The bottom line? Headwinds—including market volatility—are likely to persist.

With that in mind, we expect rising investor interest in low-volatility strategies to be a trend that continues in 2023—especially if this year is characterized by a recessionary environment, as recent inversions of the yield curve would indicate, and a potentially weaker Energy sector, with prices already well off their 2022 peak. It comes down to market risks: low-vol strategies tend to take an approach to portfolio construction that keeps risk factors top-of-mind, and that’s attractive in a year that could be defined by an economic downturn. This is especially true for institutional investors. Pension plans and similar organizations tend to take a long-term view, and low-vol has proven to be a strong factor to buy and hold.

We expect rising investor interest in low-volatility strategies to be a trend that continues in 2023.

Winning by not losing

If a recession is on the horizon for 2023, it remains to be seen whether it will be a hard landing—a long, deep, and painful downturn—or a soft landing. BMO Global Asset Management’s house view is that a shorter, shallower recession is the more likely outcome. But regardless, low-volatility strategies are likely to outperform in either scenario, with the magnitude of that outperformance potentially greater in a prolonged downturn. In general, low-vol’s strongest performance tends to happen in down markets. It’s a case of winning by not losing—if markets are down across the board, simply not declining as much as the rest of the pack is a victory. (As both mathematicians and smart investors know, a 50% decline means that you need a 100% increase just to get back to even.) And, as equity markets recover, starting from a higher level can be beneficial.

Case Study: The BMO AM Canadian Smart Alpha Equity Fund

To illustrate the characteristics and benefits of a risk-controlled, low-volatility, long-term approach to equity investing, let us examine one of Canada’s earliest such solutions: the BMO AM Canadian Smart Alpha Equity Fund.

Launched in 2011, the strategy’s performance has demonstrated its value over time and overcome the justifiable skepticism that investors sometimes have regarding new and different methodologies, outperforming the benchmark since inception in what was largely a growth-dominated period. The long-term risk-adjusted performance has been remarkably robust and accretive to unitholders. And in 2022, the Fund outperformed, declining just 3.7% in a year in which the S&P/TSX Capped Composite Total Return Index (benchmark) was down 5.8%.

BMO AM Canadian Smart Alpha Equity Fund
Cumulative returns since inception

Cumulative returns since inception for BMO AM Canadian Smart Alpha Equity Fund

Source: BMO Asset Management Inc., Bloomberg, date range from June 17, 2011 to December 31, 2022. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

Key performance metrics

Since Inception
BMO AM Canadian Smart Alpha Fund
Annualized Total Return
Annualized Total Risk
Sharpe Ratio
Annualized Active Return
Annualized Active Risk
Information Ratio
Upside Capture
Downside Capture

Source: BMO Asset Management Inc., Bloomberg, date range from June 17, 2011 to December 31, 2022.

Historical return summary

BMO AM Canadian Smart Alpha Fund
Total Return
Benchmark Total Return
Active Return
Current Quarter
Trailing 6-months
Trailing 1-year
Trailing 2-years
Trailing 3-years
Trailing 4-years
Trailing 5-years
Trailing 7-years
Trailing 10-years
Annualized Since Inception

Source: BMO Asset Management Inc., Bloomberg, date range from June 17, 2011 to December 31, 2022.

The Canadian Smart Alpha Strategy’s holistic, low-volatility approach includes a multi-factor framework which looks not just at a stock’s risk level, but also its profitability, value characteristics, and momentum in markets. The strategy emphasizes stability, including an underweight to Energy and overweight defensive sectors, such as Real Estate and Consumer Staples. To guard against interest rate exposure, the team benefit from BMO’s proprietary Machine Learning Sensitivity to Interest Rate (MLSIR) model, which measures and monitors stocks and portfolios’ exposures to rising rates and recession risks. This allows the strategy to focus on a more risk-controlled approach, without taking undue interest rate risk.


The strategy’s risk assessment process takes multiple perspectives into account: Factor, Macroeconomic, and Fundamental perspectives on portfolio construction.

comprehensive risk assessment flow chart

Source: BMO Global Asset Management.

Combining low-vol’s natural defensive qualities with these risk overlays allows the portfolio to be consistently less inflation-sensitive than the broad benchmark and positions it well for a possible recession.

Correlation factor of Canadian Smart Alpha, TSX Composite Index, and TSX Low Vol Index

Bloomberg, BMO Asset Management Inc to December 30, 2022.

Looking forward, it’s my belief that market conditions will favour asset managers who have the ability to deliver comprehensive, risk-controlled solutions, and investors who take advantage of those opportunities.

The lottery ticket effect

Recently, I was asked—what’s the next big thing in low-vol? My response was that factor investing is different from some other equity investing in that it’s not subject to what you might call the “lottery ticket effect.” Investors often focus on the wrong areas of the market, areas that promise excessive returns, but more often than not, fail to deliver. A phenomenon seen most recently with so-called “meme stocks”—companies that have gone viral in certain corners of the internet, like Reddit, outperforming significantly in the short run, but failing to deliver long-term added value, as expectations crash back to earth. The prospect of riding those companies’ coattails to riches is certainly appealing. But it’s not a reliable approach to investing for the long term.

Factor investing, conversely, is less about the next big thing and more about a tried-and-true approach. Factors are valuable because they perform over time, benefitting and underpinned by well-established investor biases that persist throughout time. Focussing on low-vol benefits from this dynamic, however a holistic approach to factors is also reflected in portfolio construction. Equities aren’t selected just because they’re lower-risk or lower standard deviation, though that is one consideration. They’re also selected for their other characteristics—quality, value, and reputation in the market. Looking forward, it’s my belief that market conditions will favour asset managers who have the ability to deliver comprehensive, risk-controlled solutions, and investors who take advantage of these enduring opportunities. The BMO AM Canadian Smart Alpha Equity Fund is a powerful example of what can be accomplished by taking such an approach to markets.

Please contact your BMO Institutional Sales Partner to learn more about the Disciplined Equity team and the BMO AM Canadian Smart Alpha Equity Fund.

Not intended for distribution outside of Canada.


Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations.

This communication is intended for informational purposes only and is not, and should not be construed as, investment, legal or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Past performance does not guarantee future results.

All figures and statements are as of month end unless otherwise indicated. Performance is calculated before the deduction of management fees. Past performance is no guarantee of future results.

The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. All investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results.

Certain statements included in this material constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO AM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO AM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO AM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.

All Rights Reserved. The information contained herein: (1) is confidential and proprietary to BMO Asset Management Inc. (“BMO AM”); (2) may not be reproduced or distributed without the prior written consent of BMO AM; and (3) has been obtained from third party sources believed to be reliable but which have not been independently verified. BMO AM and its affiliates do not accept any responsibility for any loss or damage that results from this information.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.


article collection

Mutual Funds

Sadiq Adatia
Weekly Commentary
March 20, 2023
March 2023

The Volatility Wild Card

How far will the SVB contagion reach? What impacts can be felt on regulation, interest rates, and investor sentiment? Which opportunities are flying below the radar?
Common area outside with tall buildings and people walking around
March 14, 2023

Big Troubles at Small Banks

This seismic shock was severe enough to negatively impact Canadian banks and their global peers.
Sadiq Adatia
Weekly Commentary
March 13, 2023
March 2023

Chairman Powell’s Senate Shocker

Why did investors seem shocked by Fed Chairman Powell’s hawkish comments to the U.S. Senate? Will the Bank of Canada hold interest rates steady for the rest of 2023?
Hiker stands on the edge of a cliff
Hiker stands on the edge of a cliff
Responsible Investment
March 7, 2023

Fighting Climate Change ‘Like a Girl’

Why women are crucial to successful climate action in Canada and beyond
Sadiq Adatia
Weekly Commentary
March 6, 2023
March 2023

Rumours of U.S. Housing Recovery Overestimated

Is the U.S. housing market bottoming out? Can Tesla withstand increasing competition?
Sadiq Adatia
Weekly Commentary
February 27, 2023
March 2023

The Walmart vs. Home Depot Paradox

Home Depot announced missed earnings forecasts. Walmart fared slightly better. What explains the split between retailers? Also, are markets underestimating the geopolitical risks related to Russia and China?