The ranking of the most successful equity strategies surprises even professionals. Because winners and losers are not the ones that many experts suspect. Many retail investors have little idea which equity strategies offer the greatest opportunity to beat an index investment. Do value strategies bring the biggest extra returns? Or should investors rather rely on momentum? In principle, an investor will only make a well-founded investment strategy decision if he is aware of those alternatives and their long-term results.
That this knowledge does not reach investors is also the fault of financial market research. Because like other scientific disciplines she fights with a publication bias. Economists have discovered hundreds of so-called financial market anomalies that are said to be capable of generating more returns. But the vast majority of these anomalies are statistical artifacts, incidental findings that do not reflect real return opportunities. Moreover, many of the results cannot be replicated.
A sampling period of 200 years
Anyone who wants to get meaningful figures on the returns of investment strategies as an investor must therefore be careful. Backtests over short periods (up to 20 years) are hardly more than mere coincidence. In addition, such short sampling periods frequently only contain one extreme market situation (such as a long-lasting boom phase), which determines the overall result of a strategy.
To exclude this problem, Professor Guido Baltussen, Assistant Professor Laurens Swinkels and Dr Pim van Vliet have measured the returns of various investment strategies across different international markets over a long period of time. For the stock markets in the United Kingdom and the United States, for example, they had data since 1799 and 1800 before, for France at least since 1856 and for Germany since 1870.
The three economists examined those strategies that show the strongest signs of persistent excess returns: trend, momentum, value, carry, seasonal patterns, betting against beta (BAB). The most successful strategy is Time Series Momentum or Trend. It achieved an average overperformance of about 7.5% and has a Sharpe ratio of 0.78. That is extremely good. By comparison, assuming a 10% risk-free yield and assuming a standard deviation of 20 (roughly the same as the average of the Western equity markets), the Sharpe Ratio is 0.5. This is already a very good value, so all the strategies that come with it provide excellent risk adjusted results.
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Guido Baltussen is Professor Behavioral Finance and Financial Markets at Erasmus School of Economics, Co-Head of the Quant Allocation team and Lead Portfolio Manager Liquid Alternatives and Multi-Asset strategies at Robeco
Laurens Swinkels is Assistant Professor at Erasmus School of Economics and Director Quantitative Research at Robeco
Pim van Vliet is the Head of the Conservative Equities team, responsible for Robeco’s Low-volatility strategy ‘Conservative Equities’. He holds a PhD and a Master's cum laude in Financial and Business Economics from Erasmus University Rotterdam.
