Why is a low risk equity portfolio such a great idea?
Low risk portfolios are outperforming broad market indexes. How can that be? What happened to the “truth” of high risk, high reward in the stock market?
If it’s true, that risk adjusted portfolios perform better than most index portfolios in the long run, why do investors invest their long term savings according to these benchmarks? Shouldn’t a long term investor always be optimizing the risk adjusted return (or Sharpe ratio) of their portfolio?
Have investors been lured to think that index funds is the best choice?
Minimum volatility portfolios shocked the finance world 25 years ago
25 years ago I started my career as a quantitative portfolio manager. Around that time, articles were published by Professor Robert A. (Bob) Haugen and his colleague, Nardin L. Baker. The two professors had used Markowitz’ optimisation models to follow the performance of minimum volatility portfolios in the US.
They came to the rather shocking result that these portfolios were outperforming the more traditional stock portfolios. Nobody believed their findings to be generally true, as modern finance theory relied on markets to award risk with higher returns.
20 years of experience beating the broad indexes
Only days after joining a major asset manager in Oslo, I contacted Bob Haugen and Nardin Baker.
This has turned into more than 20 years of cooperation.
We started running global core portfolios, and witnessed how low risk stocks continue to outperform. It took almost 15 years until investors were ready to trust the research, and bet money on what was called “the low risk anomaly” in the equity markets.
