Please Choose Your Country

Welcome. This website is intended solely for the use of institutional investors, consultants and other professionally recognized financial intermediaries in specific countries. Intech Investment Management LLC (“Intech”), is an investment adviser registered with the United States Securities & Exchange Commission. Intech is not permitted to offer products and services in all countries. It is the responsibility of prospective investors to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions, including the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares or securities, and any foreign exchange restrictions that may be relevant thereto. The products and services referred to in this website are not offered to any person or entity in any jurisdiction where the advertisement, offer or sale of such products and services is restricted or prohibited by law or regulation or where we would be subject to any registration or licensing requirement not currently held by Intech or our affiliates. If Intech does not offer a website for your country, please visit www.janushenderson.com.

Australia Wholesale Client Confirmation

Not your country? Please choose your country here.

This Website is intended solely for the use of wholesale clients in Australia and their professional consultants and investment advisers and is not for general public distribution.

This material on this website is not intended for distribution to, nor should it be relied upon by, retail clients. If you are a retail or individual investor, then please leave this Website.

Intech is permitted to provide certain financial services to wholesale clients in Australia pursuant to an exemption from the need to hold an Australian financial services licence under the Australian Corporations Act 2001. Intech is regulated by the Securities Exchange Commission of the U.S. under U.S. laws, which differ from Australian laws.

The words ‘Intech,’ ‘we,’ ‘us’ or ‘our’ used herein refer to Intech Investment Management LLC (“Intech”), an investment adviser registered with the United States Securities & Exchange Commission, and ‘you’ or ‘yourself’ may refer to an individual, Independent Financial Advisor, consultant, company, or other entity visiting this website. This website is issued by Intech Investment Management LLC (“Intech”).

Unless stated otherwise, information on this web site is provided by the issuer of the applicable financial product.

Information contained on this Website is published solely for general informative purposes and should not be relied upon as financial product advice. This content has been prepared without taking into account the objectives, financial situation or needs of any person. Before making an investment decision you should consider the appropriateness of the information on this website having regard to these matters and where relevant read any disclosure document relating to a financial product. You should also consider obtaining independent advice before making any investment decisions.

This website is intended only for wholesale clients (as defined by section 761G of the Corporations Act 2001) in Australia and their professional consultants and investment advisers who are who are knowledgeable and experienced in the financial services market and in investment products of this nature.

Should you proceed to access this Website, you will be representing and warranting that you are a “wholesale client” as defined by section 761G of the Corporations Act 2001. The information is not authorized for use in a jurisdiction where distribution is not authorized and is not intended for distribution to retail clients.

In continuing to access or use Intech’s Website at intechinvestments.com (“Website”), you agree to be bound by the Terms of Use applicable to your use of this Website and any information obtained from it. If you do not agree to these Terms of Use, please do not use this Website or download or read content from it.

The information contained on this web site is believed to be accurate and current at the time of compilation and is provided in good faith. Intech does not accept any responsibility arising in any way (including negligence) for errors in or omissions from information contained on this web site or for any loss or damage (whether direct, indirect or otherwise) suffered by the recipient of the information contained on this web site, or any other person. Intech does not accept any legal responsibility for material published on third party linked sites.

What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than Australia or any person in any jurisdiction where such an offer or invitation would be unlawful. Persons in respect of whom such prohibitions apply must not access this Website.

If you choose to access this Website from locations outside of Australia, you do so at your own initiative and risk, and are responsible for compliance with all applicable laws. Otherwise, please return to intechinvestments.com and choose the appropriate jurisdiction, where you will find investment products and services that are available to you.

This Website is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States. A “U.S. Person” is defined by U.S. laws and regulations in force from time to time. If you are resident in the U.S., or as a corporation or other entity are organised under U.S. law or administered by or operated for the benefit of a legal or natural U.S. person, you should take professional advice to determine whether you are a U.S. Person and you should not access this Website until you are sure that you are not a “U.S. Person”.

WE BELIEVE THAT THE INFORMATION THAT MAY BE VIEWED ON THIS WEBSITE IS ACCURATE AS AT THE DATE OF PUBLICATION, BUT WE DO NOT GUARANTEE THE ACCURACY OR CURRENTNESS OF THE DATA AND WE DISCLAIM ALL REPRESENTATIONS AND WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSES, TITLE AND NON-INFRINGEMENT. FURTHERMORE, THE INFORMATION MAY BE AMENDED BY US AT ANY TIME WITHOUT NOTICE. BY PROCEEDING YOU AGREE TO THE EXCLUSION BY US, SO FAR AS THIS IS PERMITTED UNDER APPLICABLE LAW, OF ANY LIABILITY FOR ANY DIRECT, INDIRECT, PUNITVE, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR OTHER DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS, REVENUE OR DATA ARISING OUT OF OR RELATING TO YOUR USE OF AND OUR PROVISION OF THIS WEBSITE AND CONTENT REGARDLESS OF THE FORM OF ACTION, WHETHER BASED ON CONTRACT, TORT (NEGLIGENCE), WARRANTY, STATUTE OR OTHERWISE, AND REGARDLESS OF WHETHER WE HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IF YOU ARE DISSATISFIED WITH ANY PORTION OF THIS WEBSITE, OR OF THIS IMPORTANT INFORMATION, YOUR SOLE AND EXCLUSIVE REMEDY IS TO DISCONTINUE USE OF THIS WEBSITE.

If you are unsure about the meaning of any information provided on this Website, then please consult your financial or other professional adviser. We do not offer investment advice.

Cookies: This Website uses cookies to remember your preferences and to help us to improve this Website through the use of web analytics. By continuing without changing your cookie settings we will assume that you are happy to receive cookies for these two purposes. For full details on how to manage our cookies and how we use them, please see our Cookie Policy as well as the Cookies section within our Privacy Policy.


Decline - I am not a wholesale client

This blog is the first of a two-part series examining the anomalous dislocation of equity betas we observed in the drawdown during March 2020. Part 1 looks at the sharp decline in the stock beta correlations and Part 2 examines the narrowing of the overall beta spread.

A stock’s beta is a reasonably stable attribute and typically only changes very slowly over time. Low-beta stocks generally remain low beta, while high-beta stocks tend to remain high beta. Last month, this historical relationship temporarily unraveled, regardless of how one measures beta: e.g., month-over-month versus year-over-year, or realized versus predicted (forward-looking) beta.

Month-over-Month View

The historical persistency of beta on a month-over-month basis is easy to understand. The correlation of a stock’s beta at the beginning of a month with its beta at the end of the month tends to be high, since the data used to calculate each month’s beta have a lot in common. For example, if you compute a stock’s beta by using the trailing year’s daily returns, then the betas at the beginning and at the end of the month are based on the same returns for 11 out of 12 months. However, in March 2020, correlations of month-over-month stock betas significantly declined even though over 90% of the data used in the beta computations are the same (Figure 1)!

 

Figure 1 Correlation of Month-over-Month Stock Betas for the Russell 1000 Index

 

Figure 1 shows the correlation of stock betas at the end of each month, computed for all stocks in the Russell 1000 Index. You can see that this relationship is stable most of the time, with correlations of month-apart betas generally close to 1.0, and rarely dropping below 0.95.1 As expected, a stock’s beta is reasonably persistent over time.

The picture changed dramatically in March of this year as the correlation between stock betas plummeted from 0.97 to 0.59 in a single month. Many stocks that were previously low beta became high beta, and vice versa.

A rapid change of this magnitude has only occurred once before – in October-November 1987 – when the month-over-month beta correlation dropped from 0.97 to 0.68.

Year-over-Year View

Interestingly, the correlation of stock betas from one year to the next is still typically high, even though there are no common returns used to compute the two betas for each stock. Figure 2 uses the same index to illustrate the same phenomenon as Figure 1, but this time shows the correlation year-over-year with no data overlap. Using this measure of beta, the correlation is currently at an all-time low of around 0.25.

 

Figure 2 Correlation of Year-over-Year Stock Betas for the Russell 1000 Index

 

Forward-looking View

So far, we’ve looked at simple calculations of beta using historical data, but third-party risk management tools, such as Barra,2 provide forward-looking estimates of stock betas that are intended by design to be timelier. These estimates are intended to be an improvement, but they still necessarily use backward-looking data and likely rely on some degree of beta stability. Indeed, they too tell the same story about last month: using Barra’s predicted beta, we find that correlations fell from 0.89 to 0.51 between February 29, 2020 and March 31, 2020.

Implications for Portfolios

What does this mean for your portfolio? Investors and consultants will no doubt look closely at how their portfolios responded in this unique environment. This can indeed offer some insights into the benefits of diversification at the overall portfolio level. However, we caution against drawing any firm conclusions based on a short-term anomalous period. We expect markets to normalize.

If you’d like to gain fuller insight into the unusual shift in equity betas last month and the implications for your portfolio, we invite you to download our paper, "March Mayhem: Was Your Portfolio Betrayed by Beta?"

March Mayhem: Was Your Portfolio Betrayed by Beta?  A look at beta dislocations in March 2020. Download Paper

 

1 Source for returns: CRSP. For each month between February 1980 and March 2020, initial beta is computed for each constituent in the Russell 1000 Index at the beginning of that month by regressing 253 days of arithmetic stock returns against the corresponding index returns, ending on the last trading day of the previous month. Final beta is computed for the same population of stocks in the same manner, except the 253 days of returns end on the last day of the month in question. Missing data, and returns greater than 638.9% or less than -86.5% (i.e., logarithmic return > 200% or < -200%), are replaced with index returns. The correlation between initial and final beta for the given month across all constituents is computed and depicted in the Figure. The same methodology is used to compute stock betas in the results shown in Figures 2, 3 and 4.
2 MSCI’s Barra predicted beta is a “fundamental” beta based on a multi-factor model, which regresses historical company returns against the returns of a market index using company-risk and industry-risk factors, re-estimated on a monthly basis, within the regression equation.
The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value. Hypothetical performance results presented are for illustrative purposes only. Hypothetical performance is not real and has many inherent limitations. It does not reflect the results or risks associated with actual trading or the actual performance of any portfolio and has been prepared with the benefit of hindsight. Therefore, there is no guarantee that an actual portfolio would have achieved the results shown. In fact, there will be differences between hypothetical and actual results. No investor should assume that future performance will be profitable, or equal to the results shown. Hypothetical results do not reflect the deduction of advisory fees and other expenses incurred in the management of a portfolio.