The Morningstar Ibbotson Conference 2013 got off to an informative and ground-breaking start early Thursday in Hollywood, Fla., with Roger Ibbotson’s talk about market theories that fall apart under close scrutiny.
Ibbotson, who is the founder of Ibbotson Associates (now part of Morningstar), a Yale professor and the chairman of Zebra Capital Management, revealed findings from an unpublished study that he and Daniel Kim, research director of Zebra Capital, recently completed.
Ibbotson said, “While in theory, high-beta and high-volatility stocks outperform their low-beta and low-volatility counterparts, in practice it’s the low-volatility and low-beta stocks that outperform.”
The difference? From 1972-2012, the mean performance of low-beta stocks was 14.03%. The result for high-beta stocks was 8.25%. “Low beta beats high beta,” said the investment expert, “and the same is true when you look at low daily and monthly volatility.”
In other words, “The relationship is the opposite of what we are used to thinking about less risk,” Ibbotson pointed out. “This turns 60 years of theory on its head.”
This finding, he adds, is both “a gold mine” for experts and a “troubling” development. “Do we smile or get upset? … I’m in both camps.”
Another surprise revealed by Ibbotson and Kim was that large companies outperform smaller ones when using Fama-French analysis. “Surprisingly, large beats small,” he said. “This is a big surprise.”