Beta compression during the Lehman sell-off…
- When market participants sell indiscriminately, stocks don’t necessarily behave as their betas would predict. In particular, lower beta stocks may underperform what their betas would imply. It’s not surprising to see this “beta compression” when markets fall sharply.
- In the month following the 2008 Lehman Brothers bankruptcy, for example, DM low volatility benchmarks outperformed cap-weighted indexes (MSCI World down more than 20%) but underperformed their long-term betas.
- As investors rotated into more defensive stocks, low beta performance came back into line with long-term expectations; downside protection of low volatility portfolios stabilized and then improved for the remainder of the crisis.
… and coronavirus
- As MSCI World fell more than 10% after news that COVID-19 was spreading beyond Asia, low volatility benchmarks again underperformed their historically estimated betas.
- Low beta DM stocks recovered relative to their long-term beta informed expectations during the snap-back rally in early March. In this case, defensive stocks enjoyed gains similar to cyclicals, perhaps due to the continuing decline in yields.
- As a result we have seen the downside protection of DM low volatility portfolios recover – more quickly than during the initial stages of the 2008 GFC.
Low Beta DM Returns during Two Crises
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