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Residual Equity Momentum for Corporate Bonds
An enhanced low-volatility strategy, which also provides exposure to valuation and sentiment factors, can improve returns by up to 6% a year.
Corporate bond returns consist of two distinct components: an interest rate component, which is default-free and anti-cyclical, and a credit spread component, which is default-risky and pro-cyclical.
In this Research Note we show that low-risk credits had superior risk-adjusted excess returns over the past 20 years.1 By selecting low-risk bonds from low-risk issuers, investors would have earned credit-like returns at substantially lower risk.
We provide a proof that volatility weighting over time increases the Sharpe or Information Ratio. The higher the degree of volatility smoothing achieved by volatility weighting, the higher the risk-adjusted performance
In this study we evaluate the performance of actively managed equity mutual funds against a set of passively managed index funds.
The volatility effect is present in US stock returns in every decade from 1931-2009. During these decades, low-volatility stocks produced a positive absolute return, with lower risk than the market-capitalization-weighted index.