Factor Olympics Q3 2019
And the Winner is…
October 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Most factors generated positive returns in Q1-3 2019
- Low Volatility produced the best and Value the worst performance year-to-date
- The factor rotation from Momentum into Value in Q3 was short-lived
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 highlights positive excess returns across market cycles and asset classes. Other strategies like Growth might be widely-followed investment styles, but lack academic support and are therefore excluded.
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: 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.
Most common equity factors generated positive performance in the first three quarters of 2019, with only Value being negative. The performance leadership is similar to the last decade with the Low Volatility and Quality factors exhibiting the highest returns. Value continues to generate negative returns and the performance accumulates to what can be considered a lost decade for investors focused on buying cheap and selling expensive stocks.
