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- Title
Risk-Mitigated Deep Value--Bigger Bang, Less Buck.
- Authors
Brown, Rob
- Abstract
Value and growth are not simple binaries; instead, they reside on a continuum. Value comes in degrees or intensities, with deep value at one end of this continuum. Over the past 97 years, value has outperformed growth, and deep value has outperformed value. But no investor can wait 97 years for this result to become dependably harvestable. The periodic painful downdrafts along such a lengthy journey would leave the result unpalatable. This article suggests that the benefits of deep value can be retained and the unpleasant risk attributes can be partially mitigated through the use of a simple active risk management approach based on surprise to the upside in the current yield on BAA corporate credit. When such surprises occur, the risk managed portfolio moves out of deep value and into intermediate-term US Treasury bonds. Over the past 97 years, risk-managed moderately aggressive deep value returned 15.57% versus the total market's lesser 10.81%. Moreover, the risk managed moderate deep value portfolio, evaluated herein, delivered the smallest left-hand-tail risk and the smallest knockout risk of all portfolios considered. During episodic periods of rising interest rates, risk managed moderate deep value returned 19.12% versus growth's 12.95. And during episodic periods of rising inflation, it obtained a similar but even stronger result, with risk managed moderate deep value earning 12.49% versus growth's modest 6.61%. Moreover, during periods of slow or no economic growth for the US economy (as defined by 12-month real GDP), risk managed moderately aggressive deep value returned 5.81% versus growth's miserly 0.23%. And finally, when the value risk premium has been in one of its bull phases (71.6% of the months over the last 97 years), risk managed moderately aggressive deep value earned 25.57% per year versus growth's 11.74%. These data suggest the possibility for earning a superior return relative to the total market and also with respect to growth, when a risk managed approach to deep value is utilized.
- Publication
Journal of Beta Investment Strategies, 2023, Vol 14, Issue 4, p46
- ISSN
2771-6511
- Publication type
Academic Journal
- DOI
10.3905/jbis.2023.1.046