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Key Ideas
- Investors found few places to hide in the recent and sudden equity market drawdown. Even previously defensive, low-beta stocks weren’t exempt from losses.
- In this paper, we share our observations of an anomalous shift in equity betas across the market, in the form of a sharp decline in correlations of stock betas and a narrowing of the overall beta spread.
- We believe this unusual behavior is likely to be short-lived and its impact may be mitigated by portfolio construction approaches. Long-term, however, we believe the rewards of systematic defensive equity strategies remain intact.
March 2020 saw a dramatic increase in the volatility of equities worldwide, as the magnitude of the economic impact of the COVID-19 pandemic became increasingly undeniable. The sell-off in stocks was unusually broad-based; very few stocks escaped a large drawdown — even previously defensive, low-beta stocks, which may have been expected to provide some refuge in the sharp market decline we saw in March. There were very few places to hide. But why?
