Factor Olympics 2022 

And the winner is…

January 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • 2022 is the best year for factor investing over the last decade
  • Value generated the best and size the worst return in 2022
  • Despite the strong returns, investors remain cautious on factor investing 

INTRODUCTION

We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only present factors where academic research supports the existence of positive excess returns across market cycles and asset classes (read Factor Olympics Q3 2022). 

METHODOLOGY

Our factors are created by constructing long-short beta-neutral portfolios of the top and bottom 30% of stocks in the US, Europe, and Japan. 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 RETURNS

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.

Factor investing has not been an easy strategy over the last decade as most investors favored technology stocks with strong growth prospects, which are typically found in the short portfolios of value, quality, and low volatility. In 2022, investors’ preferences changed with rising interest rates which led to the best year for evidence-based investors over the last decade as all of the well-known factors generated positive returns, except for the Size factor.

An equal-weighted portfolio of beta-neutral factors produced a return of 7.5%, which would have generated attractive diversification benefits for a traditional equity-bond portfolio, given that this was substantially down in 2022 (try Finominal’s Alpha Analyzer for a factor exposure analysis).