Skip to main content

Low-Beta Funds Show Superior Performance

These six funds with low-but-positive beta coefficients outperformed the S&P 500 in the third quarter.

For more coverage from Ratings team, check out Ratings section.

In a market environment where single-digit percentage losses seem attractive when compared with the pounding suffered by most stocks and equity indices, "low-beta" mutual funds are standing out by making good on their implied missions of immunizing their holders from the full impact of the bear market.

The accompanying table of a half dozen funds with low-but-positive beta coefficients exhibits a rarity in the current environment of triple-digit-down days in the

Dow Jones Industrial Average

: performance numbers devoid of double-digit negative percentages.

Before we get to the data, let's review what is meant by "beta." A fund's beta coefficient is a measure of its performance relative to a broad market gauge such as the

S&P 500

. A fund with a beta coefficient of 1.25 would have tended to gain 12.5% when the market moved up 10%. A fund with a beta of 0.60 has tended to ease 6% when the market has lost 10%. (The precise calculations for determining beta coefficients are somewhat complex, involving a statistical technique known as "regression analysis" that uses logarithms of fund returns that are adjusted to measure their excess over risk-free rates of return.)

Beta coefficients of mutual funds can be found on Yahoo! Finance and Google Fiannce. (For more background on "beta," check out

The Finance Professor: Understanding Risk


The impact of beta coefficients is underscored by the second list in the table below, which contains six funds with high-beta coefficients. Whereas the return for each fund in the low-beta list for each time period is better than that of the S&P 500, each high-beta fund underperformed the S&P for each interval. This included the past three years, when the S&P managed a fractional gain. (Leveraged funds were excluded from the "high-beta" list.)

The only funds likely to supply complete refuge from a bear market would be ones with negative beta coefficients that have tended to achieve positive returns when the market tanks. But values of such funds are subject to erosion during periods of rising stock prices.

The low-beta funds in the adjoining table have reasonably high correlations with the stock market, as gauged by a statistical measure known as the "R-squared" value. In addition, each of the six is at least 50% exposed to the equity market, including convertible securities. Some of the funds on the low-beta list have "short positions" in equity securities.

As might be expected of funds distinguished by slow and steady performances, the portfolio holdings of the low-beta funds are dominated by stocks such as

General Electric






Johnson & Johnson






Even though the

Calamos Market Neutral Income Fund


invests in convertible securities and employs short-selling, its performance over the past three years correlates highly with the S&P 500 -- albeit with swings of more subdued amplitude than the S&P.

Multiply CVSIX's three-year beta coefficient of 0.37 times the S&P's three-month return (through Sept. 30) of minus 8.37 and a "model" return of negative 3.10% is produced, not far from the fund's actual return of minus 3.03%. The same methodology produces an expected return of minus 7.14% for the year to date, surprisingly close to the fund's actual negative-7.08% performance for the period.

For the latest 12 months, the simplified "beta model" forecast return is negative 8.13% versus CVSIX's performance of minus 6.02%. (Actual calculations using the beta model are more complex than this simplified example.)

CVSIX's major portfolio positions include General Electric,

JPMorgan Chase



Exxon Mobil


and IBM.

The low-beta

First Eagle U.S. Value Fund Fund


holds gold commodity in addition to major positions in

Berkshire Hathaway


, J&J and Wal-Mart.

The Gateway Fund


is the most highly correlated of any fund on the low-beta list with the S&P 500 total-return index. It surrendered a slim 1.02% in the three months ended Sept. 30 and advanced at an annualized pace of 4.97% over the past three years, far outdistancing the 0.21% pace of the S&P.

GATEX's major holdings, in addition to standbys Exxon, GE and IBM, include











Oppenheimer Quest Opportunity Value Fund


maintains a reasonably correlation with the domestic S&P 500 despite some exposure to foreign securities. The fund also engages in short-selling and uses derivative investments for hedging purposes or to seek higher investment returns. It has portfolio positions in Exxon and

Philip Morris



A position in S&P 500 mini index futures helps link the

Russel Flex Equity Fund


to the popular market benchmark. Other major portfolio positions for the fund include










Eli Lilly



Least correlated with the S&P 500 of the low-beta funds in the table is the

Diamond Hill Long-Short Fund


, which, as its name implies, engages in short-selling. The fund's major "long" portfolio holdings include




Anadarko Petroleum



Wells Fargo



While the low-beta funds have retreated less than most market gauges during the bear market, they do run a distinct risk of "opportunity loss" by achieving only subdued gains relative to high-beta selections during a bull market -- if and when one finally emerges.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.