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April 01, 2013 at 08:00 PM
(Hollywood, Fla.) The Morningstar Ibbotson Conference 2013 had an informative and ground-breaking start to its Feb. 21-22 agenda 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(now part of Morningstar), a Yale professor and the chairman of Zebra Capital Management, revealed findings from an unpublished study that he and Daniel Kim, research director of Zebra Capital, recently completed.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.”
In the Fama-French analysis, which looks at beta factors/coefficients, large companies had returns of 12.44% over the 1972-2012 time period on average vs. 9.89% for small. Plus, the larger firms had lower volatility (as measured by standard deviation).
Small companies did outperform when capitalization was examined as the key variable: 13.49% vs. 11.22% for large firms. But large companies do better when their total assets, revenue and net income are taken into consideration.
In other analysis, the latest Ibbotson research found that value beats growth. “In this area, theory and practice are consistent—you get premiums for going into value vs. growth,” the speaker said, noting that value portfolios tend to have lower risk.
The researchers also found that less-liquid stocks outperform their more-liquid counterparts as measured by two different analytical methods. One method, for instance, found that less-liquid stocks had returns for 14.74% over the last 40 years vs. 10.77% for more-liquid issues. “But, the risks differ,” Ibbotson said. “Less-liquid stocks are higher risk.”
The standard deviation (or beta) was 24.6% for the less-liquid stocks vs. 19.35% for the more-liquid issues. Overall, Ibbotson said, “The lower-turnover stocks give you the greater returns at lower risk than value stocks do, and coming in a close second are the low-beta, low-volatility shares.”
Investor Intelligence
While mutual fund investors may have problems over the timing of when to buy and sell funds, they aren’t really “dumb” in the traditional or theoretical sense, says John Rekenthaler, vice president of research for Morningstar. He and his colleagues looked at why investors were “not making money that one might expect from funds,” a conundrum they defined as the “return gap.”
Most analysis looks at total returns, which are time-weighted, and compares them to investor returns, which are dollar-weighted. But the Morningstar experts decided to calculate a money-weighted measure of returns to help them assess a fund’s internal rate of return and then compare these numbers with time-weighted returns.
The result? A return gap, which could help the analysts better assess investor behavior.
From 2002-2012, the initial research revealed that this gap was 1.01% for domestic-stock funds, 3.11% for international-stock funds, 1.35% for municipal bonds, 0.87% for taxable-bond funds, and 0.84% for allocation funds.
