Low Beta vs. High Beta: Different Ride, Similar Destination

November 4, 2021

Not surprisingly, higher beta, growth-oriented stocks and sectors have performed very strongly1 in what’s largely been a bull market environment since the end of the financial crisis in early 2009. But now is not the time to discount the role of certain defensive equities in a diversified portfolio.

A longer look back at markets shows low beta defensive equities delivered very similar performance to high beta sectors … but with a less bumpy ride.

The table below puts this in perspective. Over the past 32 years, the three lowest beta sectors2, which we use as a proxy3 for defensive equities, trailed the three highest beta sectors4 by a small margin, with an annualized return of 10.8% for the defensive group and 11.2% for the high beta group.

Most significantly, the two groups arrived at those returns quite differently. We segmented the market environments of the past three-plus decades into two largely bull market periods and one largely bearish period.

2021.11 Reaves Blog Low Beta vs High Beta Chart

The difference in performance during the bear market segment shown above is striking, and highlights why investors should regularly review the level of risk being carried in their equity holdings. The cumulative total return of the high beta sectors in the 8 ½ year period from September 1, 2000 to February 28, 2009, was -65.9% compared to -2.3% for the more defensive, low beta sectors.

 

Putting it All Together

In our blog post last month entitled Reconsidering 60/40, we encouraged investors to consider shifting some of their fixed income allocation into defensive equity strategies, a change which would, at the margin, increase the overall level portfolio risk in the search for higher returns.

In this post, we share over three decades of data to demonstrate that attractive, competitive investment returns in equities are possible to achieve without taking on excessive risk.

In our example, the three sectors of the S&P 5005 with the lowest beta had only slightly lower returns over the past 32 years than the three highest beta sectors — and these returns were generated with less than half the risk — beta of 0.61 versus 1.23, respectively. Defensive, low beta equities provided quite a different experience for investors in terms of volatility, especially during the challenging period from September 2000 to February 2009 for U.S. equity markets.

We believe that there are clear benefits from having a portion of your equity allocation dedicated to low beta, defensive investment strategies. We encourage investors to examine the amount of risk in their portfolios and to review some of the strategies offered by Reaves Asset Management which can be found on our website at www.reavesam.com.

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Disclosures and Definitions:
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, employee-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 A hypothetical portfolio comprised of the three S&P 500 Index industry sectors with the highest beta generated an annualized return of 20.5% compared to 17.5% for the S&P 500 Index in the period from 3/1/09 to 9/30/21.

2 The three lowest beta sectors of the S&P 500 Index are: Utilities, Consumer Staples, and Health Care. Reaves’ managed portfolios are not currently invested in Consumer Staples and Health Care.

3 The proxy for low-beta defensive equities used in this blog is not fully representative Reaves’ managed portfolios.

4 The three highest beta sectors of the S&P 500 Index are: Information Technology, Financials, and Industrials.

5 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.

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.

Total Return is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes capital appreciation and the reinvestment of dividends and any other distributions.

Bull Market is a period of time during which asset prices consistently rise. For purposes of this blog, a bull market phase is considered to have ended when a bear market phase has begun. 

Bear Market is a period of time during which securities prices consistently fall. For the purposes of this blog, a bear market phase is considered to have ended when a bull market phase has begun.

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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