Restoring Value to Minimum Variance
Journal of Investment Management (JOIM), Second Quarter 2014
Posted: 6 Mar 2015
Date Written: May 22, 2014
A long-only investable minimum variance strategy outperformed the S&P 500 over the four decades from January 1973 to December 2012. Through the lens of a factor model, we show that this outperformance can be largely attributed to implicit style bets. Specifically, minimum variance has thrived by tilting toward stocks that have lower market capitalization and volatility, and a higher ratio of earnings to price. As funds have poured into minimum variance in the wake of the financial crisis, and plausibly as a consequence of this trend, the value tilt has disappeared and a momentum tilt has emerged. This suggests that the cost of entry to minimum variance is at a historic high. We show how the value tilt can be restored to minimum variance by targeting specific exposures, and that there was a substantial long-term benefit to the restoration at most recent points of entry to the strategy.
Keywords: Minimum variance strategy, low-beta stocks, low-risk anomaly, value tilt, momentum tilt, factor model, style factors
JEL Classification: G00
Suggested Citation: Suggested Citation