Buffett: low volatility anomaly master

A recent paper by Frazzini (et al) at AQR uncovers the driver behind Warren Buffett’s returns:

we find that the alpha become statistically insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Berkshire’s average leverage is about 1.6-to-1 and that it relies on unusually low-cost and stable sources of financing. Berkshire’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks.

In other words, low beta investing with leverage.  The previous post showed a low beta quintile portfolio turning $1 in 1974 to $100 in 2007 [CAR 14%].

Berkshire Hathaway returns $1500 over the same period [CAR 24%], which matches Frazzini’s estimated leverage [24/14.5 = 1.6].  There is a significant reduction in rate of return from 1998.  However, a strategy based on Buffett’s style appears to retain effectiveness over the entire period (outside recessions), consistent with a low beta strategy.

Figure 3:


This strategy is outside the reach of the individual investor due to the size of the portfolio and frequent rebalancing.  But could the strategy be approximated using a low beta fund?  Access to low cost financing for leverage is the key.  Buffett’s borrowing costs are legendary: the free float from his insurance business.  Unfortunately for the privateer, interest is likely to consume much of the 10% per annum generated by gearing.

An alternative is to find a fund or manager aligned with this strategy.  For example, AQR has a low volatility fund AUEIX:


SPLV is the largest fund in this category at $4B assets and 2.7% yield.

Robeco offers enhanced low volatility funds and has several billion under management also:


None of these funds employs leverage though.


3 thoughts on “Buffett: low volatility anomaly master

    • Chad, sorry for the response delay. ZLB.TO seems to be well diversified. Personally, I am concerned about a decline in CAD over the next few years so wish to diversify into USD also. Dividend paying stocks are probably also overvalued at this time as evidenced by the outperformance of the DOW over the other indices. I am looking further into performance of various beta segments for an upcoming post.

      For reference:

      ZLB.TO Top 10 Holdings (35.99% of Total Assets)
      Company Symbol % Assets
      Fairfax Financial Holdings Ltd FRFHF.TO 5.00
      Metro Inc. MTRAF.TO 3.92
      Shoppers Drug Mart SHDMF.TO 3.86
      George Weston Limited WNGRF.TO 3.57
      Emera, Inc. EMRAF.TO 3.29
      BCE INC. BCE.TO 3.25
      Canadian Utilities Ltd CDUAF.TO 3.22
      Saputo, Inc. SAPIF.TO 3.13

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