Factor Olympics Q1 2024
And the winner is…
April 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Some factor trends continued from 2023, but there were also two significant rotations
- Momentum performed the best, size the worst
- Most long-short multi-factor products have generated positive excess returns
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.
METHODOLOGY
Our factors are created by constructing long-short beta-neutral portfolios of the top and bottom 30% of stocks. 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 EXCESS 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.
We observe a continuation of last year’s trends in factor performance for the quality, value, and size factors, but also a significant rotation from being the worst- to the best-performing factors for momentum and low volatility. A theoretical portfolio providing equal-weighted exposure to all five factors would have generated 1.6% year-to-date.
