Factor Olympics Q1 2020
And the Winner is…
April 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Beta-neutral long-short factors were largely negative during Q1 2020
- Momentum & Quality are leading the performance leaderboard
- Investors were most negative on small cap and cheap stocks
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 2019).
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 capitalization 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.
Factor investing has been disappointing in the first quarter of 2020 as the performance of a classic multi-factor portfolio was significantly negative. Given that global stock markets crashed and these factors are constructed via beta-neutral long-short portfolios, investors could have hoped for at least some factors to generate strong positive returns. Momentum and Quality stocks did outperform, but only barely.
