Prior forays into negative
territory during this cycle (in 2011, 2012, 2013, and 2016) have accompanied
signs of slowing, but have also reflected the broader interest rate
environment. Slower global growth, increasingly accommodative central banks,
and some flight to safety due to trade uncertainty have all conspired to push
rates lower.
The
expected inflation rate implied by 10-year TIPS sits at about 1.5%, low
historically but still higher than the cycle low and well above the near 0% hit
in the heart of the last recession. Slower growth has minimized inflationary
pressure, but over the last three months we have seen a modest pickup in
inflation and wages.
The table below
details SPLV’s portfolio characteristics on a year-by-year basis versus SPY.
Values in red denote underperformance by the low-vol portfolio. The fund’s
lifetime numbers, shown in the gray row at the bottom of the table, are indeed
impressive: a higher average annual return, lower volatility and a resultant
higher Sharpe ratio, along with a positive alpha coefficient and information
ratio.
Within that time
span, however, there’s a lot of, um, volatility in the numbers. In those years
when SPLV’s standard deviation was higher than SPY’s, there was a cascading and
deleterious effect on returns and other portfolio metrics.
So, what’s the
point of all this? Simply put, capture of the low-volatility anomaly is path
dependent. Just because there’s a low-vol product available doesn’t mean you’ll
always derive immediate benefit from its use. Look at the back-to-back
underperformance in the 2012-2013 and 2013-2014 spans. Would you have been
disappointed by SPLV back then? Would you have bailed from the low-vol
strategy?
Many investors,
in fact, did just that. Net outflows mounted in the 2013-2014 period and even
spilled over into the subsequent period, just ahead of a couple of banner
years. And in the 2016-2017 span, SPLV’s net outflows totaled $1.4 billion as
the low-vol ETF significantly lagged SPY.
Good Full Read
When Low-Vol Is Not-Strategy may require some time to pay off. Brad Zigler
| Sep 09, 2019
