High-beta stocks that saved 2019 serve notice of its risks

Bloomberg

High-beta stocks, occupants of the market’s frenetic edge, were the names everyone wanted to own in the fourth quarter, when they rallied on signs of peace.
Saviours of active funds, the high-beta group — defined as companies that do a little better or a little worse than standard benchmarks — annihilated all comers over the last three months of 2019 as President Donald Trump quieted his trade war. But as new and hard-to-define risks arise in the form of flaring tensions with Iran, the cohort’s shine is in jeopardy after it fell twice as much as the S&P 500.
Obsessing over investment styles may seem pedantic but mattered in the fourth quarter, when an epic rally in the most volatile stocks turned 2019 from a devastatingly bad year for stock pickers into a slightly less-awful one. Choosing correctly among a palate of quant flavours that also includes value and momentum shares is likely to get harder should geopolitical flareups keep calling the market’s tune.
“Those searching for high returns through these leveraged, high-beta type investments — events like this show you that it can work both ways,” said Chris Gaffney, president of world markets at TIAA.
“Volatility is not a one-way street. You may see a shift back out of those and toward more of the vanilla-type trades.”
It’s hard to exaggerate the dominance of volatile equities at year end.
Higher in nine of the last 11 weeks, an Invesco high-beta exchange-traded fund stuffed with semiconductor and oil companies surged 20% in less than three months. Its low-volatility counterpart, dominated by REITs and insurance firms, managed just 2%, marking the largest performance gap between the two strategies since the period that followed the 2016 presidential election.
For a few active managers who jumped ship from the safety trade that prevailed in the first three quarters, the
flip-flop provided a measure of salvation.
At the start of October, just 29% of large-cap actively managed core mutual funds were ahead of their benchmarks for the year, Jefferies data showed. Helped by the high-beta rally, 36% beat in the fourth quarter.
Investors everywhere went along the trade at year end, raising their allocation to equities in general and opting for more volatile industries like industrials and semiconductors.
In the three months ended in December, ETFs tracking technology stocks took in $5 billion, more than all 10 other S&P 500 sectors combined, Bloomberg data show.
Meanwhile, safe industries including utilities and consumer staples had their first outflows of the year.
An ETF that tracks the 50 US stocks most widely held by hedge funds, the Goldman Sachs Hedge Industry VIP fund, saw its holdings in technology and consumer discretionary shares expand in the fourth quarter. At almost 33%, the fund’s tech weighting is the second highest it’s been since it launched in 2016, a Bloomberg portfolio analysis shows.
Alas, in a year when the S&P 500 surged almost 30%, almost anyone trying to beat it was doomed to be thwarted. Even with the fourth-quarter improvement, just 32% of active managers beat their benchmarks over all of 2019, the worst rate in three years.