Financial Analysts Journal May/June 2015 Volume 71 Issue 3
Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios
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.
About the Author(s)
Dr. Luis Garcia-Feijóo, CFA, CIPM, is an associate professor of finance at Florida Atlantic University (FAU), where he teaches investments and international finance. He also serves as associate editor of the Financial Analysts Journal and as associate research director for CFA Institute Research Foundation. Prior to joining FAU, Dr. Garcia worked as director, exam development, at CFA Institute, and was an associate professor at Creighton University. He has published his research in leading academic and practitioner journals, such as the Journal of Finance, Review of Asset Pricing Studies, Journal of Banking and Finance, Financial Analysts Journal, and Journal of Portfolio Management. Dr. Garcia is co-author of the book Invest with the Fed: How to Maximize Portfolio Performance Following Federal Reserve Policy. He holds a PhD in finance from the University of Missouri-Columbia. Dr. Garcia actively served on the Board of Directors of the CFA Society of South Florida from 2009 to 2014 and has been an active volunteer for CFA Institute since 2009.
As executive director of the Richard A. Mayo Center for Asset Management, Rodney Sullivan has primary leadership and managerial responsibility for the administration and oversight of all of the center’s activities. Sullivan joined the Darden School from AQR Capital Management, the Greenwich, Connecticut, based investment management firm where he served as vice president and head of investment content. An investment industry publishing leader with an extensive track record of developing and communicating innovative research and ideas, Sullivan helped establish and led the firm’s editorial board and also was a founding member of the AQR Asset Management Institute at London Business School. Prior to joining AQR, Sullivan worked as head of publications and editor of the Financial Analysts Journal at the CFA Institute for more than 10 years, including oversight responsibilities for a suite of publication services aimed at the investment community. A Chartered Financial Analyst, Sullivan holds a bachelor’s and master’s degree in economics from Virginia Commonwealth University. He lives in Charlottesville with his family and currently serves on the editorial board of the Journal of Alternative Investments.
Peng Wang, CFA, is head of portfolio research at TIAA Endowment & Philanthropic Services, Houston.