Low beta investing strategies appear to be picking up fans thanks to a recent spate of academic research promoting the idea that investors can achieve market returns, while limiting volatility, by investing in certain low beta stocks. However, a screening for domestically listed stocks, with a beta under 0.6, yields almost 300 different equities. Few money managers, let alone individual investors have the time, motivation, or know how to sift through that many stocks. But using history as your guide, building a portfolio of fundamentally strong, low beta stocks can be simple.
By back testing several combinations of screening parameters I was able to zero in on the best filters to combine with a low beta requirement. The following strategy assumes a total investment of $100k, and a 12 month holding period. From the universe of domestically traded equities I screen for companies with a market cap of at least $50 million, gross margin of at least 30%, return on assets of at least 10%, 5-year EPS growth of at least 0%, a price of at least $5 and select only stocks trading above their 200 day moving average. I then rank that list of candidates by beta (low to high) and hold the top 10. I run the strategy on the first trading day of the year going back to 1987, and analyze the results.
The portfolio below shows what an investor utilizing this low beta strategy would have held as of the first trading day of 2012:
Stock | Sector | Current Price (8/6/12) | 2012 Return on Investment |
Johnson & Johnson (JNJ) | Healthcare | 68.84 | 6.92% |
Campbell's Soup (CPB) | Con Staples | 32.77 | 0.30 % |
Coca-Cola (KO) | Con Staples | 80.64 | 16.88 % |
Nathan's Famous (NATH) | Con Cyclical | 33.17 | 57.80 % |
Mesa Labs Inc. (MLAB) | Healthcare | 46.48 | 12.75 % |
Family Dollar Stores (FDO) | Con Cyclical | 65.44 | 14.25 % |
Lorillard Inc. (LO) | Con Staples | 125.92 | 13.17 % |
Abbott Laboratories (ABT) | Healthcare | 66.37 | 21.01 % |
Untied Guardian (UG) | Healthcare | 16.901 | 12.97 % |
Colgate-Palmolive Co. (CL) | Con Staples | 106.35 | 17.28 % |
Over the past 25 years this relatively basic strategy has produced an average return of over 13% and saved investors countless sleepless nights in 2000 and 2008 by experiencing draw downs that were only a fraction of the overall market. This year, thanks to increasing interest in dividend income and low beta stocks, this strategy has produced gains of over 16%.
As investors begin to ease back into the market and money managers continue to play it safe, low beta strategies continue to be appealing. Investors looking to implement this strategy today should build the following portfolio:
Stock | Sector | Beta | Market Cap |
Utah Medical Prod Inc (UTMD) | Healthcare | 0.13 | 125M |
Coca-Cola | Con Staples | 0.44 | 179B |
Lorillard, Inc. | Con Staples | 0.43 | 16B |
Nathan's Famous | Con Cyclical | 0.21 | 143M |
Mesa Labs Inc. | Healthcare | 0.46 | 155M |
Family Dollar Stores | Con Cyclical | 0.38 | 7.7B |
The Clorox Company (CLX) | Con Staples | 0.35 | 9.2B |
Abbott Laboratories | Healthcare | 0.46 | 103B |
CR Bard Inc. (BCR) | Healthcare | 0.64 | 8.2B |
Colgate-Palmolive Co. | Con Staples | 0.35 | 49B |
Disclosure: I am long CL.
