Why You Don’t Have to Take Large Industry Bets (Podcast)
In a January 2014 article with Lasse H. Pedersen, Andrea Frazzini presented a “betting against beta” (BAB) model. The authors found, among other things, that significant positive risk-adjusted returns are produced by the BAB factor. In the July/August 2014 issue of the Financial Analysts Journal, Frazzini expanded on this concept with coauthors Clifford S. Asness and Pedersen in the article “Low-Risk Investing without Industry Bets.”
We got the chance to chat with Frazzini about his research.
In reaction to the betting against beta strategy, some have argued that such low-risk investing delivers high returns because of industry bets, which tend to prefer slowly changing, stable industries. Frazzini and his coauthors contested this notion and showed that BAB provides positive returns as an industry-neutral bet within each industry and as a pure bet across industries.
As Frazzini explains it, “In order to take advantage of this particular effect, investors have to take large industry bets, which some investors consider sort of an undesirable characteristic of these portfolios. What we’ve done in this article is to actually test this hypothesis, to essentially show that lower-beta, lower-volatility portfolios actually earn higher returns within industries.”
The authors found that the industry-neutral BAB strategy delivered positive returns in 60 of 70 global industries and all 49 US industries they examined — a finding that demonstrates outstanding regularity. Furthermore, the article’s conclusions are consistent with the leverage-aversion theory of why low-beta investing is effective.
“We think this influences practice in the sense that this article shows that you actually don’t have to take large industry bets in order to take advantage of the low-beta, low-volatility anomaly,” Frazzini said, “and therefore, you can build portfolios that are much more balanced in terms of risk allocation across industries or that are not overly concentrated in a given industry, which is something extremely relevant for lots of investors.”
To hear Frazzini discuss the findings and their implications for investors, listen to the full interview (above) or download the MP3.
You can also access the full article on the CFA Institute Publications website.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
