Factor Olympics 1H 2020
And the winner Is…
July 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Momentum & Quality are leading the performance scoreboard in 1H 2020
- Value & Size generated negative returns, like in recent years
- Low Volatility failed to preserve capital during the COVID-19 crisis
INTRODUCTION
We present the performance of five well-known factors on an annual basis for the last 10 years. We only present factors where academic research supports the existence of positive excess returns across market cycles and asset classes. Strategies like Growth might be widely-followed investment styles, but lack academic support to be considered a factor and are therefore excluded (read Factor Olympics Q1 2020).
METHODOLOGY
Our 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 capitalization of $1 billion are included. Portfolios rebalance monthly and transactions incur 10 basis points of costs.
FACTOR OLYMPICS: GLOBAL
The table below shows the long-short 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, highlighting the benefits of diversified exposure.
2018 and 2019 were considered challenging years for factor investing as diversified multi-factor portfolios generated low to negative returns. To complicate things further, the first half of 2020 was even more difficult. Value, Size, and Low Volatility yielded negative performance, which was not compensated by the positive returns of the Momentum and Quality factors, resulting in negative performance for a classic multi-factor portfolio.
