|Another one, by the same author, extending the dataset back to 1976. Results still good, actually a little better.|
The table below shows the annualized return and standard deviation of monthly returns for the S&P 500, Agg, a 60/40 combination of the two, our Low Volatility proxy, and a roughly 80/20 combination of Low Volatility and the Agg.
Over this expanded period, the 60/40 portfolio trailed the S&P 500 by just 136bp per year, but with only 65% of the variability. It is no wonder that has become a well-used portfolio allocation heuristic. The Low Volatility portfolio, however, produced higher annualized returns versus the S&P 500 (+94bp per annum) with less than 80% of the variability. Similarly, the 80% Low Volatility/20% Aggregate Index portfolio delivered slightly higher returns than the S&P 500 (+0.03% per annum) with roughly the same variability as the 60/40 portfolio.
Importantly for this analysis, Low Volatility outperformed the S&P 500 from 1976-1991. Notably, it also outperformed the S&P 500 over the 1976-1981 period that featured sharply higher interest rates. While low volatility stocks tend to be more interest rate sensitive, a feature that makes them a good fixed income substitute, they lowest volatility quintile of the U.S. equity market still bested the S&P 500 over that period of rising rates, best this S&P 500 by over 1% per annum with less than three quarters of the variability.
The graph below shows the cumulative return profile of the different strategies over the full expanded dataset from 1976 through 2019.
The outperformance of Low Volatility was likely aided by the size factor, since I expanded the selection universe beyond the low volatility constituents of the large cap S&P 500. I have often captured the tremendous performance of low volatility small ( XSLV) and mid-cap ( XMLV) stocks, most notably in the article on My Favorite Market Dataset. The relative outperformance of low volatility stocks versus the S&P 500 was in part driven by the underperformance of high beta stocks ( SPHB) over this horizon.