Barclays explores how the CAPE ratio can be used to systematically allocate across equity sectors, aiming to capture value while managing risk through diversification and volatility controls. The paper argues traditional valuation timing is less effective, while a rules-based CAPE approach improves outcomes. Notably, it suggests sector rotation driven by CAPE can outperform broad markets over time.
The Many Colours of CAPE
Barclays
Robert Shiller, Farouk Jivraj
Research
25 Pages
Key Takeaways
Systematic Value Allocation: Selecting the cheapest 5 of 11 sectors monthly based on CAPE improved long-term returns, with consistent outperformance versus benchmarks over multi-decade backtests.
Volatility Targeting Impact: A 10% volatility control mechanism reduced drawdowns significantly, smoothing returns compared to an unadjusted equity strategy during stressed periods like 2008.
Momentum Filter Enhancement: Removing the weakest 1 of 5 sectors using 12-month momentum improved risk-adjusted returns, increasing Sharpe ratios meaningfully versus pure value-only approaches.
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