Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
April 14, 2014 01:00 AM

Acadian's Baker explores anomaly of low-risk stocks: Returns are pretty good

Barry B. Burr
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Malcolm P. Baker said the risk-return relationship is different than previously thought.

    Malcolm P. Baker, Robert G. Kirby Professor of Business Administration, Harvard Business School, and director of research, Acadian Asset Management LLC, Boston, finds a puzzle in the lack of arbitrage between high- and low-risk stocks.

    An “interesting empirical fact both in the U.S. and international (market) data is that low-risk stocks have tended to perform better than you would expect given their risk profile,” Mr. Baker said in an interview. “They really do reduce risk, but the average returns are equal to or higher than higher risk portfolios.”

    Acadian is incorporating that low-risk anomaly as a managed volatility strategy in its portfolio management, Mr. Baker said.

    In terms of measuring risk to arrive at the conclusion, Mr. Baker said, “There have been academic papers that have done it in various ways, either with standard deviation or with beta. They are reasonably correlated with each but they produce slightly different portfolios.”

    “Risk and return aren't that related,” appearing as a more flat than inverse relationship, Mr. Baker said.

    A paper that contributed to the application of the idea to investment management is “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” in the January/February 2011 Financial Analysts Journal. It is co-authored by Mr. Baker and Brendan Bradley, Acadian director of managed volatility strategies, and Jeffrey Wurgler, the Nomura professor of finance, Stern School of Business, New York University; research associate, National Bureau of Economic Research; and Acadian senior consultant. Their article received a CFA Institute Graham and Dodd Scroll Award in 2011.

    In their paper, the co-authors wrote, “Among the many candidates for the greatest anomaly in finance, a particularly compelling one is the long-term success of low-volatility and low-beta stock portfolios. Over 1968-2008, low-volatility and low-beta portfolios offered an enviable combination of high average returns and small drawdowns. This outcome runs counter to the fundamental principle that risk is compensated with higher expected return.”

    Their study, as reported in their article, “applied principles of behavioral finance to shed light on the drivers of this anomalous performance and to assess the likelihood that it will persist.”

    “(S)ome market participants are irrational” in some ways, and biases and overconfidence “lead to a demand for higher-volatility stocks that is not warranted by fundamentals,” pushing up price and driving down expected return, while the reverse occurs for lower-risk stocks, the co-authors wrote.

    Their study examined why the “smart money” of sophisticated institutional investors “does not offset the price impact of any irrational demand” and overweight in low-volatility stocks. Market-capitalization-weighted benchmarks typically used by institutional investors “discourage investments in low-volatility stocks.”

    In the interview, Mr. Baker said, “You have these institutional and behavioral effects combined with limits to arbitrage. That is a theoretical framework. That then gives you a template for thinking about how securities can be mispriced and what sorts of data might be useful in identifying patterns of stock returns.”

    “And that's the big area of research on the alpha side in terms of predicting stock returns,” he said.

    Among other investment techniques inspired by academic research, Mr. Baker said, “What's on the cutting edge ... (is) text analysis.”

    Text analysis extracts information from text, whether it is in 10-K filings, newspapers or social media, Mr. Baker said. Using text analysis can contribute to predicting “short-term returns in ... individual securities or the market as a whole,” Mr. Baker said.

    Acadian uses text as part of “multiple factors in explaining returns,” Mr. Baker said. “The goal is to convert the text into something that is a score, effectively” quantifying it.

    It analyzes text for content that might contribute to informing investment decisions.

    In terms of interpreting the content of a few articles, “you'd probably be able to do that better than a computer,” Mr. Baker said.

    But Acadian's text analysis seeks to extract information from text on a large scale from thousands of articles every day, Mr. Baker said.

    Related Articles
    Dimensional implements profitability factor in equity strategies
    Absorption ratio getting new converts
    Factor-based approach gains momentum
    Debate continues on underlying reason for factor investing
    Ibbotson: Less liquidity doesn't mean more risk
    Dimensional implements profitability factor in equity strategies
    Absorption ratio getting new converts
    Factor-based approach gains momentum
    Debate continues on underlying reason for factor investing
    Ibbotson: Less liquidity doesn't mean more risk
    Acadian Asset Management hires senior member for research team
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    Sponsored
    White Papers
    Exploring the Commercial Application of Artificial Intelligence
    Conflict Minerals: The human cost of our electronics
    Research for Institutional Money Management
    Private real estate entry points emerging amid selloff
    2023 Hot Topics in Retirement and Financial Wellbeing
    Bonds: Shaken, but Not Stirred
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars