Bridge over ocean
1 May 2015 Financial Analysts Journal Volume 71, Issue 3

Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios

  1. Luis Garcia-Feijóo, CFA, CIPM
  2. Lawrence Kochard
  3. Rodney N. Sullivan, CFA
  4. Peng Wang, CFA

Research showing that the lowest-risk stocks tend to outperform the highest-risk stocks over time has led to rapid growth in so-called low-risk equity investing in recent years. The authors examined the performance of both the low-risk strategy previously considered in the literature and a beta-neutral low-risk strategy that is more relevant in practice. They found that the historical performance of low-risk investing, like that of any quantitative investment strategy, is time varying. They also found that both low-risk strategies exhibit dynamic exposure to the well-known value, size, and momentum factors and appear to be influenced by the overall economic environment. Their results suggest that time variation in the performance of low-risk strategies is probably influenced by the approach to constructing the low-risk portfolio strategy and by the market environment and associated valuation premiums.

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