Strategy Claims Equity Returns, Bond Volatility
Jan 4th, 2007 | Filed under: CAPM / Alpha TheoryBy: Joel Chernoff, Pensions & Investments
Published: December 25, 2006
Everyone head to the cafeteria, SEI is serving up a “free lunch”! The firm has introduced a new strategy that forsakes higher volatility stocks in favour of their lower volatility brethren. It’s tasty and doesn’t give you heartburn according to the firm. As you might guess, the strategy underperforms the index in a bull market and out-performs in a bear market. (A quick check of the publicly-traded version of the strategy (NASDAQ: SVOAX) reveals that it did indeed outperform the S&P500 during the flat market of 2005 and has trailed it since the S&P500 woke up in late 2005.)
But if this sounds a lot like simply de-levering the index, read on. SEI cites new research that shows the long-term growth of its low-vol equity subset beats the return of the index as a whole (see February 2006 research from Columbia University corroborating this theory). In a twist that is sure to make Fama & French happy, SEI argues that low-vol (value) stocks out-perform high vol (growth) stocks over the long term. If this is in fact true then institutions, says SEI, can plough more money into equities without the incurring their unpleasant side effects (volatility).
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