switzerlanden
After a ‘terrific’ decade, what’s next for low-risk stocks?

After a ‘terrific’ decade, what’s next for low-risk stocks?

05-03-2020 | Insight
The decade of 2010 to 2019 was an exceptional one for equity investors, in many ways. Yet in this very specific context, one thing remained unchanged: enhanced low volatility strategies continued to fare well.
  • Jan Sytze  Mosselaar
    Jan Sytze
    Mosselaar
    Portfolio Manager
  • Pim  van Vliet, PhD
    Pim
    van Vliet, PhD
    Head of Conservative Equities

Speed read

  • 2010-2019 saw the longest and steadiest global bull market ever
  • Low volatility was the winning factor on a risk-adjusted basis
  • We believe that combining multiple signals is the key to future success

2010 to 2019 was full of surprises. At the start of the decade, in the aftermath of the worst market crash since the 1930s, most investors had little hope and no expectation of the returns that subsequently followed . On average, global markets rose by an annual rate of 10%. But that wasn’t all.

The past decade also saw the spectacular rise of FAANG and BAT stocks. US stocks outperformed all other regions by a wide margin and the growth investment style outperformed value. Most importantly, both equity and bond markets rose simultaneously, leading to attractive returns for all balanced portfolios. Finally, because returns were high and equity market volatility was generally low, the resulting return/risk ratio was particularly strong, especially for US stocks.

In this context, the past decade also proved to be remarkable from a factor performance perspective. Generally speaking, it was the best decade in recent history for low volatility, offering the highest return per unit of risk. This was the case in global markets, US markets and emerging markets but not in Europe.

In Europe, momentum was the winner, both in terms of absolute and risk-adjusted returns, followed by the low volatility factor. Moreover, momentum delivered the highest absolute return in other regions. Meanwhile, value generated the lowest return and also the lowest return per unit of risk in all regions. For value investors, the decade was more like the ‘terrible tens’ than the ‘terrific tens’.

Now also follow us on Instagram
Now also follow us on Instagram
Follow

More like the 30s than the 90s

Over the past few years, many parallels have been drawn between the 1990s and the 2010s. For instance, the fact that momentum was the strongest factor in both decades. Yet value didn’t struggle as much in the 1990s, outperforming the market as well as the low volatility, high dividend and small caps factors. In fact, the 2010s were much closer to the 1930s.

Just like in the 2010s, the value style also came last in the 1930s, while momentum had a strong run. Moreover, the recovery seen in the 2010s, after a severe global stock market crash, echoes the recovery of the 1930s. However, unlike the 2010s, the 1930s were characterized by low returns and high risks, an environment in which low volatility stocks tend to perform well relative to other styles.

The low volatility factor is alive and kicking, clearly showing its added value in the past decade, especially when adjusted for risk

So the low volatility factor is alive and kicking, clearly showing its added value in the past decade, especially when adjusted for risk. In fact, when compared to a set of other factors, including value momentum, size and high dividend, the low volatility factor came out as the strongest factor of the last nine decades, with the highest return/risk ratio of all factor styles (see Figure 1).

Figure 1: Best factor performance across decades

Robeco, based on Kenneth French Database

But if the 2010s can be likened to the 1930s, should we expect the 2020s to resemble the 1940s? Should low volatility investors be worried? Indeed, during the 1940s, markets rose sharply. And while the value factor delivered a very strong performance, low volatility lagged the market and all other factors. During this period, low volatility stocks were expensive, just as they are now.

Yet stocks featuring a smart combination of low volatility, high net pay-out yield and positive momentum still managed to comfortably beat the market during the 1940s and 1950s, despite the focus on lagging low volatility stocks. This illustrates the importance of enhanced factor strategies that take into account multiple complementary signals.

This also supports the investment process of our Conservative Equities strategies, which select low-risk stocks with a high income, attractive valuation and positive momentum, among other characteristics.

Ready for this decade

For the coming decade, we expect this enhanced approach to low-risk investing, which combines multiple complementary signals, to become even more relevant than during the past decade. In particular, taking valuation signals into account could prove critical, as the value factor could make a comeback, after a lackluster previous ten years.

Seven years ago, we wrote a paper on the performance of low volatility stocks in periods when they were more expensive than the market, which mostly occurred during the 1940s and 1950s. We argued that an enhanced low volatility strategy can offer a measure of protection from this kind of scenario. And we still stand by this argument today.

Logo

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree