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CA-EN Institutional

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

March 31, 2023
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With a recession potentially around the corner, Chris Heakes, Head of Disciplined Equity, BMO Global Asset Management, examines opportunities in low-volatility investing for the remainder of 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 that certain elements of that difficult market environment 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, 2022 calendar year performance . 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.

There are some promising signs, including indications from central banks that they may be ready to take their foot off the gas pedal, by either decelerating the magnitude of rate increases or pausing them altogether like the Bank of Canada did. But core 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 continuing trend. It comes down to market risks: low-vol strategies tend to take an approach to portfolio construction that keeps risk factors top-of-mind, which is attractive in a year defined by volatility. 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.

Winning by not losing

If a recession is on the horizon, 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 relative 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 overcame 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 its benchmark by over 2%, 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 March 31, 2023. 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 March 31, 2023.

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 March 31, 2023.

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) , 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 more resilient than the broad benchmark and positions it well for a possible recession.

This image is a chart that shows funds positioned for higher recession risk

Bloomberg, BMO Asset Management Inc to July 31, 2023.

Looking forward, it’s the team’s 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, we were asked—what’s the next big thing in low-vol? Our 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 from 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 have a 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 our 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.


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