The Paradox of Low-Risk StocksBy Kent Hargis and Chris Marx
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A white-paper by Kent Hargis and Chris Marx, portfolio managers at AllianceBernstein argues that the best stock investment strategy for the long-run is "low-volatility, high-quality".
That begs the question, why low-vol portfolio outperform in the long run? The simple answer is "compounding". A more volatile stock does outperform in upturns but also underperforms significantly during downturns. And following downturns, they take long longer to get to break-even point.
The second question is why does this "anomoly" persist? The authors cite two reasons (1) behavorial biases and (2) agency issues.
From portfolio standpoint low-vol stocks provide additional benefit because they do not share many characteristics with "growth" or "value" stocks. That means their inclusion in a portfolio will enchance the portfolio's efficient frontier.
The third question is, there must be a catch! Yes there is, and that is investors must have "long horizon". So it is ideal for pension fund managers especially given new pension-accounting and insurance-solvency regulations.
