The long-run value of Conservative Equities

The long-run value of Conservative Equities

01-03-2019 | Research
Should low volatility investing just be about minimizing volatility? Since 2006, we have designed our Robeco Conservative Equities strategy to achieve a maximum absolute return per unit of absolute risk, by focusing not just on volatility but also on other proven factors, including value and momentum. In this research note, we dig deeper and investigate the strategy’s drivers of returns over time.
  • Pim  van Vliet, PhD
    van Vliet, PhD
    Portfolio Manager and Co-Head of Robeco’s Quantitative Equities department

Speed read

  • Conservative Equities outperforms minimum-volatility indices in the long run
  • Added value is the highest when value and momentum factors are strong
  • Performance is stable over the business cycle, especially during recessions
More specifically, we analyze the strategy’s long-term returns, in view of the performance of different proven factors over time. We show that the factors’ performance can be linked to the economic cycle and that factors do perform differently in each phase of the cycle. For example, low volatility and high dividend tend to do relatively well during periods of economic contraction. By contrast, quality and momentum tend to do well in periods of economic growth.
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Erratic relative performance

Differences in factor exposures explain why the relative performance of the Conservative Equities strategy tends to be erratic over time, even though it generates the highest long-term risk-adjusted returns compared to the market and all major MSCI single-factor indices. For instance, there is a significant chance that Conservative Equities will underperform the MSCI World Minimum Volatility Index on a one-year (31%) or five-year basis (11%).

The Robeco Conservative Equities strategy is successful over a full economic cycle

The past five years have been marked by particularly weak performance by the value factor. In some cases, momentum compensated for this but, conversely, it was often weak when value was strong. The value and momentum tilt of the Robeco Conservative Equities explains why, in more recent times, the strategy has lagged the MSCI World Minimum Volatility Index.

Successful over a full cycle

However, our analysis also shows the Robeco Conservative Equities strategy is successful over a full economic cycle, outperforming both the market and the MSCI World Minimum Volatility Index. The strategy’s enhanced exposure to the value factor helps boost returns during recession and recovery periods, while exposure to the momentum factor is beneficial during periods of above-average economic growth.

Predicting single-factor index performance is even more difficult than predicting economic downturns and recoveries. Therefore, we argue that the Robeco Conservative Equities strategy, with its enhanced exposure to multiple proven factors, it is highly suitable for long-term investors and those who are expecting the best but preparing for the worst.


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