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How a 'Low Volatility' Stock Plunged 85% in an Hour

MARKETWATCH 8:03 AM ET 3/24/2017

Reading the label isn't enough for picking funds (https://www.wsj.com/articles/the-problem-with-low-vol-stock-funds- 1465178521). You may need to go into the ingredients list, too.

Take a look at funds that track the MSCI Minimum Volatility Emerging Markets Index. On Friday a constituent stock fell 85%--in one hour, about as volatile as you can get. China Huishan Dairy, which had a weighting of around 0.7% in the index before the crash, lost more than $4 billion in market value. Since the company is in other MSCI indices, there are many funds that hold the stock. BlackRock, for example, owns around 1.3% of the company, according to FactSet.

The company halted trading in its shares just after the plunge. But there were hints all along (https://www.wsj.com/ articles/no-more-milk-in-this-chinese-cow-company-1453432660)this low-vol play was anything but.

One worry sign was the quarter of the company's shares pledged by its largest shareholder and chairman, Yang Kai, to a bank in return for a loan in December. When a bank fears that it may not recover the full value of share loan, it may choose to dump the shares in the market, as happened with other Hong Kong stock plungers (http://blogs.wsj.com/ moneybeat/2016/07/28/curious-case-of-hong-kongs-tandem-stock-plungers/), notably, Tech Pro Technology(3823.HK) and Hanergy Thin Film Power. Huishan itself has also racked up mounds of debt, including by using its cows as collateral.

A gaggle of Wall Street banks, including Deutsche Bank, HSBC, Goldman Sachs and UBS, brought Huishan Dairy to market in 2013 (https://www.wsj.com/articles/SB10001424127887323308504579084190227785978), selling it as well placed to benefit from rising Chinese consumption. The stock quickly slid far below its IPO price. Mr. Yang then began systematically buying shares (https://www.wsj.com/articles/no-more-milk-in-this-chinese-cow-company-1453432660), helping the price recover. It traded at a remarkably narrow range over the past 18 months, giving it an eerie impression of stability.

Low volatility is great while it lasts.

Write to Jacky Wong at [e-mail] (mailto:[e-mail])

-Jacky Wong; 415-439-6400; [e-mail]


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