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’.
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).
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.
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.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.