Quick Take: Low-Volatility Investing – No Pain, No Gain
Magnificent 7 stocks have driven market returns
- Since 2023, the Magnificent 7 stocks have dominated market performance, leading to levels of concentration not seen since the TMT bubble. In 2024 through mid-July, developed markets rose 16.3%, with the Magnificent 7 stocks accounting for over 20% of the MSCI World by weight and contributing to around 40% of the return.
- Markets experienced their largest drawdown since 2022 over the period from July 17th to August 5th, with the MSCI World falling 8.2% and the Magnificent 7 stocks again accounting for roughly 40% of the return. High beta stocks suffered a large pullback over this period significantly underperforming low beta stocks, as illustrated in the top right chart.
- Low-volatility provided strong downside protection over this period, recouping most of the YTD active losses in just a few weeks.
Maintaining low-volatility allocations during speculative periods: a prudential approach
- Low-volatility strategies have continued to provide substantial downside protection during extended drawdowns and periods of heightened volatility as demonstrated recently and in 2022 when the MSCI World returned -18.1%.
- The bottom chart illustrates that while developed low-volatility portfolios have experienced challenging active performance since 2023, investors who have capitulated on the strategy in favor of a market portfolio or other factor styles may have missed out on significant downside protection.
- Given current market conditions and risks highlighted in recent macroeconomic data, we continue to have a favorable view on stable low-volatility allocations.
Performance of Low Beta & High Beta Stocks: YTD through August 5th
Absolute MSCI Factor Index Performance
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