Adopt barbell strategy for outperformance
In 1Q19’s CIO Insights “Tug of War”, we advised investors to adopt a “barbell strategy” in their portfolios, given our view that broad market indices are expected to trade in a wide range and in a volatile manner this year.
In a barbell, weights are loaded on both ends of a metal bar. Thus, a portfolio that adopts a barbell strategy has allocations that are concentrated at both ends of the risk spectrum. From an equities standpoint, this means overweighting the portfolio with both high-growth stocks and stable, income-generating ones.
Will this strategy result in outperformance? Our analysis suggests so.
Barbell strategy outperforms during periods of elevated volatility. Historically, the barbell strategy has translated to substantial outperformance during periods of elevated market volatility. We applied and tracked the performance of this strategy in the US equity market. For this analysis, our “US Equity Barbell Portfolio” consists:
· S&P 500 Technology: 30%
· S&P 500 Consumer Discretionary: 30%
· S&P 500 Dividend Aristocrats*: 40%
We tracked the performance of this barbell portfolio during two periods of elevated volatility over the past 28 years (Figure 1):
· June 1997 to June 2003: the VIX Index averaged at 25.2 vs the long-term average of 19.3.
· June 2008 to December 2011: the VIX Index averaged at 28.2 vs the long-term average of 19.3.
From June 1997 to June 2003, average monthly return for the S&P 500 Index was 0.3% while average return for the “barbell portfolio” was 0.7%. On a cumulative basis, the S&P 500 gained 14.9% during the period while the “barbell portfolio” surged 41.1%, constituting an outperformance of 26.2 percentage points (Figure 2).
*An index of companies that have increased dividends every year for at least 25 consecutive years.
Figure 1: Barbell strategy outperformed during periods of elevated volatility
Source: Bloomberg, DBS
Figure 2: US equity “Barbell Portfolio” outperformed during high volatility from 1997-2003
Source: Bloomberg, DBS
Figure 3: Similarly, the strategy managed to outperform from 2008-2011
Source: Bloomberg, DBS
Similarly, from June 2008 to December 2011, the S&P 500 registered monthly losses of 0.1% while the “barbell portfolio” saw monthly gains of 0.5% on average. On a cumulative basis, this translated to a 10.2% loss for the S&P 500 and a 14.3% gain for the “barbell portfolio”, constituting an outperformance of 24.5 percentage points (Figure 3).
Investment implication. Global financial markets will be caught between the cross-currents of geopolitical uncertainties, monetary policy ambiguity, and moderate economic growth momentum this year. Thus, we expect volatility to stay elevated, and higher returns can be generated by adopting a barbell strategy in portfolio allocations.
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