RT Journal Article
SR Electronic
T1 Fact and Fiction about Low-Risk Investing
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2020.1.146
DO 10.3905/jpm.2020.1.146
A1 Ron Alquist
A1 Andrea Frazzini
A1 Antti Ilmanen
A1 Lasse Heje Pedersen
YR 2020
UL https://pm-research.com/content/early/2020/03/04/jpm.2020.1.146.abstract
AB Low-risk investing within equities and other asset classes has received a lot of attention over the past decade. An intensive academic debate has spurred, and been spurred by, the growing market for low-risk strategies. This article presents five facts and dispels five fictions about low-risk investing. The facts are as follows: Low-risk returns have been (1) strong historically, (2) highly significant out of sample, (3) robust across many countries and asset classes, and (4) backed by strong economic theory but, nevertheless, (5) can be negative when the market is down. The fictions this article dispels are that low-risk investing (1) delivers weaker returns than other common factor premiums, (2) is mostly about betting on bond-like industries, (3) is especially sensitive to transaction costs and only works among small-cap stocks, and (4) has become so expensive that it cannot do well going forward. Lastly, the article dispels the fiction that (5) the capital asset pricing model (CAPM) is dead and so is low-risk investing—this statement is a contradiction. If the CAPM is dead, then low-risk investing is alive.TOPICS: Factor-based models, style investing, volatility measuresKey Findings• Low-risk investing has historically delivered significant risk-adjusted returns, both in sample and out of sample.• Low-risk investing can be applied across asset classes, with strong returns in equities, government bonds, credit markets, and beyond.• Low-risk investing can be applied based on statistical risk measures (e.g., beta) or fundamental risk measures (e.g., stable profits).