Factor Olympics 1H 2018
And the Winner is…
July 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Factor performance in 1H 2018 is comparable to 2017
- The Size factor has taken the lead, likely reflecting the threat of global trade wars
- Value has generated the most negative returns across regions
INTRODUCTION
We present the performance of seven well-known factors on an annual basis for the last 10 years and the first half of 2018. It is worth mentioning that not all factors have strong academic support, e.g. Growth lacks a long-term track record of positive excess returns; however, is still a widely-followed investment style (read Factor Olympics Q1 2018).
METHODOLOGY
The factors are created by constructing long-short beta-neutral portfolios of the top and bottom 10% of stocks in the US, Europe and Japan and 20% in smaller markets. Only stocks with a minimum market capitalisation of $1 billion are included. Portfolios rebalance monthly and transactions incur 10 basis points of costs.
FACTOR OLYMPICS (LONG / SHORT): GLOBAL
The table below shows the factor performance for the last 10 years ranked top to bottom. The global series is comprised of all developed markets in Asia, Europe and the US. Aside from displaying the factor performance the analysis highlights the significant factor rotation in terms of profitability from one year to the next.
The first half of 2018 shows largely a continuation of 2017, i.e. Growth, Momentum and Quality generated positive returns while Value and Dividend Yield were negative. The Size factor generated the strongest returns in Q2 as the performance was flat in Q1 and has taken performance leadership since then. The strong performance of small caps can likely be explained by the threat of global trade wars, which are based on policy changes of the US government. Investors anticipate that smaller companies will be less negatively impacted by trade tariffs than larger companies.
