Factor Olympics Q1 2018
And the Winner is…
April 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- 2018 started negative for the majority of factors
- Momentum, Quality and Growth showed the strongest performance
- Low Volatility, Dividend Yield and Value generated negative returns
INTRODUCTION
We present the performance of seven well-known factors on an annual basis for the last 10 years and the first quarter 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.
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 quarter of 2018 shows a continuation of 2017, i.e. risk-off factors like Quality and Growth generated positive while risk-on factors like Size and Value generated negative returns (read Factor Olympics 2017). Momentum, which has a large bias towards the Technology sector in the long portfolio, is leading factor performance. It is worth highlighting that negative returns for the multi-factor portfolio, which allocates equally across the seven factors, are relatively rare.
