Factor Olympics Q1 2019
And the Winner is…
April 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- 2019 has started favorable for factor investors, compared to 2018
- Low Volatility generated the best and Value the worst performance
- Factor performance is comparable in the US & Europe, but different in Japan
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 (read Factor Olympics 2018).
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.
The year 2019 has started favorably for factor-focused investors as most factors show positive performance in the first quarter, with only Value being negative. The performance leadership is similar to the last decade with the Low Volatility, Quality, and Momentum factors exhibiting the highest returns.
