LONGEVITY | INCOME | VOLATILITY | ESTATE | INFLATION | TAXES
BETTER RISK-ADJUSTED RETURNS:
EXPLOITING THE ‘low BETA ANOMALY’
Market fluctuations are a fact of investing life. But high volatility tends to lead to poor investment decisions – more buying at market peaks
and panic selling at market lows. Understanding the “Low Beta Anomaly” can help achieve better risk-adjusted returns.
the low beta anomaly
LOW-BETA STOCKS SHOW
HIGHER RETURNS HISTORICALLY
S&P 500 (SIMULATED) 1983-2013**
• Traditionally, investors have expected higher returns from stocks with higher volatility
relative to the market
• However, research shows that low-beta stocks (those with lower volatility than the overall
market) have outperformed high-beta stocks over time
10%
8%
Beta is a measure of risk. It tells you how much a stock fluctuates in price relative to movements in the
general market. The market has a beta of exactly 1. A beta less than 1 indicates that a stock is less volatile
than the market. For example, a stock with a beta of 0.50 can be expected to fall (or rise) by only half the
market change. Low-volatility stocks typically have low beta.
Returns
• This finding is called the “Low Beta Anomaly”
6%
4%
Low-Beta
Mid-Beta
High-Beta
2%
0%
SIMILAR RETURNS, LOWER RISK
Given a choice between two funds with similar returns, most prudent investors who want to sleep better at night and resist the urge to
make rash investment decisions would pick the one with lower volatility or lower risk.
The efficiency of the risk/return trade-off can be measured by something called the Sharpe ratio.* The Sharpe ratio demonstrates that lowvolatility stocks offer a more effective risk/return balance over time. And this is not the result of those stocks being concentrated in certain
industries. It occurs across most sectors.
LOW-BETA STOCKS SHOW A MORE EFFECTIVE RISK/RETURN BALANCE ACROSS MOST SECTORS
S&P 500 (SIMULATED) 1983-2013**
Risk-adjusted Return Gauge
(Sharpe Ratio)
HIGH
1.0
Low-Beta
Mid-Beta
Financials
Technology
High-Beta
0.8
0.6
0.4
0.2
0
LOW
Energy
Materials
Industrials
Consumer
Discretionary
Consumer
Staples
Health Care
Telecom
Utilities
* The Sharpe ratio is calculated by taking an investment’s excess annualized return (its return above the risk-free rate) and dividing by volatility (standard deviation).
**Source: Standard & Poor’s. Portfolios formed each month based on predicted beta. Transaction costs not included. Hypothetical outcomes are for illustrative purposes only and are based on certain assumptions that
could change without notice or prove to be incorrect. Different assumptions would produce different results. Hypothetical data is subject to risk, does not reflect actual investment results of any particular markets,
product, or account, and cannot guarantee or assure future results. Dec. 31, 2013.
FOR ADVISOR USE ONLY
WHY DOES THE low BETA ANOMALY EXIST AND PERSIST?
Behavioral biases: Low-beta stocks attract less attention from investors because they tend to be less exciting companies. But
studies show that over time the market rewards stability and reasonable valuations.
Benchmarking: Institutional investors have a short-term incentive to outperform benchmark indexes that include high-beta stocks.
They are willing to pay up for high-beta stocks, leading to overvaluation and a performance lag in the long run.
Leverage aversion: When pursuing higher equity returns, many investors use high-beta stocks as a substitute for leverage. The extra
demand this creates causes high-beta stocks to become overvalued relative to low-beta stocks.
why invest in a LOW VOLATILITY fund
• Lower volatility reduces losses caused
by downturns
• Shorter recovery leads to higher
compounded growth potential
• Stocks with lower volatility can perform
better over time compared to highvolatility stocks
LOWER VOLATILITY REDUCES DOWNTURNS, RESULTING IN HIGHER COMPOUNDED
GROWTH POTENTIAL
$20,000
S&P 500 Total Return
$18,000
US Low Volatility Fund (Simulated)
$16,000
$14,000
$12,000
-8.5%
$10,000
-4.5%
$8,000
$6,000
$4,000
Dec-99
-50.0%
-42.5%
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Source: Bloomberg, Dec. 31, 1999 to Dec. 31, 2013
Mackenzie US LOW VOLATILITY FUND:
Actively selecting low-beta stocks for better risk-adjusted returns
• Actively selects low-volatility stocks
Mackenzie US Low Volatility Fund exploits the Low Beta Anomaly
by actively selecting low-beta stocks. The managers use both
quantitative and qualitative analysis to identify high-quality
stocks that are historically less volatile than the market
• Diversifies across all sectors
The Fund diversifies to reduce risk by avoiding over
concentration in certain sectors
• Protects using an option strategy
Buying puts reduces volatility by limiting downside risk, while
selling calls helps to pay the cost of the puts
• Manages currency risk
The Fund aims to hedge 50% of its US exposure back to the
Canadian dollar, which can reduce portfolio volatility*
Get these insights working for you with
Visit talkliveit.com
* The Fund is permitted to hedge from 0% to 100% of its foreign currency exposure at the discretion of the manager.
**For illustrative purposes only. Backtested performance is theoretical, is subject to risk, and cannot guarantee or assure future results. The
backtest is based on certain assumptions that are based on the current view of Putnam Investments and could change without notice
or prove to be incorrect. Different assumptions would produce different results. Performance results were prepared with the benefit of
hindsight. For more information please refer to talkliveit.com
00401
ADVISOR USE ONLY. No portion of this communication may be reproduced or distributed to the public. Commissions, trailing
commissions, management fees and expenses all may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may
not be repeated.
LONGEVITY | INCOME | VOLATILITY | ESTATE | INFLATION | TAXES
ABOUT THE MANAGERS
Robert Schoen, MBA is Portfolio Manager
of Mackenzie US Low Volatility Fund and CoHead of the Global Asset Allocation Team at
Putnam Investments
Adrian Chan, CFA is Portfolio Manager of
Mackenzie US Low Volatility Fund and part
of the Global Asset Allocation Team at
Putnam Investments
MF3953 10/14
Mackenzie US Low Volatility Fund