High Time for Low Beta?

September 1, 2021

With markets1 hitting fresh highs, and risks lurking in the form of potential Federal Reserve tapering, the spread of the Delta variant of COVID-19 and increasing geopolitical tensions, is it time to evaluate whether you need low beta strategies in your portfolio?

Higher beta strategies have generally benefited investors in recent years as the market grinded higher in all but a few brief periods. But defensive, low beta strategies, such as Reaves’ Long Term Value Strategy2, may also play a vital role in investors’ portfolios, compounding returns over time, but with less volatility.

In the current market environment, we believe such strategies may serve three key investor groups:

  • Those carrying high levels of cash who have been concerned about entering the stock market. A strategy with low volatility may be a good way to introduce these investors back into equities.
  • Those worried about future returns from their fixed income portfolio. We have written about this in a recent investment brief; low rates portend much lower returns for fixed income today than in previous decades. As such, investors may benefit from replacing a portion of their bond allocation with defensive equities that could achieve higher returns, but without moving out too far on the risk spectrum.
  • Those who have become overweight technology and other growth stocks and want to lower the overall risk level in their portfolio.
Lower Beta, Longer Term

We believe low beta and low volatility is a key feature of Reaves’ strategies. The tables below put both of those statistics in perspective for our Long Term Value Strategy. The first table shows the strategy’s beta for various periods ended 6/30/21, relative to the S&P 500 Index3. For comparison, we also show the S&P 500 Global Infrastructure Index4 and Russell 1000 Value Index’s5 beta relative to the S&P 500.

Table 1.

2021.09 Reaves Blog High Time Low Beta Table 1.2

The second table shows our standard deviation over the same period, which was considerably lower than the S&P 500, S&P 500 Global Infrastructure Index and Russell 1000 Value Index: 

Table 2.

2021.09 Reaves Blog High Time Low Beta Table 2.2

Want to Learn More? To learn more about our defensive strategies, and the types of companies we invest in, we encourage you to read our investment brief:

 

The Case for Essential Service Infrastructure

 

Disclosures:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 Markets refer to major U.S. equity indices such as the Nasdaq Composite and Dow Jones Industrial Average.

The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange.

2 Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.

3 The S&P 500 Index (“S&P 500”) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The typical Reaves portfolio includes a significant percentage of assets that are also found in the S&P 500. However, Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based S&P 500.

4 The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities. It is not possible to invest directly in an index.

5 Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. These stocks are selected from the 1,000 largest companies in the Russell 3000 Index. Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based Russell 1000 Value Index.

6

Product Name
Beta - 1 Year using S&P 500 (06/2021)
Beta - 3 Years using S&P 500 (06/2021)
Standard Deviation - 1 Year (06/2021)
Standard Deviation - 3 Years (06/2021)

Reaves LTV Wrap Composite

0.58

0.70

13.65

15.76

S&P Global Infrastructure Index

0.87

0.91

14.69

19.89

Russell 1000 Value Index

0.91

1.04

15.20

20.08

S&P 500 Index

1.00

1.00

14.62

18.52

 

7 Inception date of the Reaves Long Term Value Wrap Composite is 1/1/03. Inception date of the S&P Global Infrastructure Index is 2/22/07.

Beta measures a stock’s volatility relative to the broad market. A stock with a beta higher than 1.0 has historically been more volatile than the market, while a stock with a beta lower than 1.0 has been less volatile.

Standard deviation is a measure of the variability of returns-the higher the standard deviation, the greater the range of performance (i.e. volatility). The data shown reflects the deduction of investment management fees and/or transactions costs. Standard deviation is based on quarterly data. The risk/return data shown are based on historical annualized rates of return and standard deviations of the Reaves LTV SMA Wrap Composite.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index. 
Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s own individual circumstances from an independent tax adviser.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A.
Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS.
Additional information about Reaves may be found on our website:  www.reavesam.com.
2021 © Reaves Asset Management (W. H. Reaves & Co., Inc.)

 

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