Factor Olympics Q2 2021
And the winner is…
July 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- The Q1 2021 factor rotation into Value and Size has reversed
- Value is the only factor with positive performance in 1H 2021
- Momentum has generated the most negative 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 (read Factor Olympics Q1 2021).
METHODOLOGY
Our 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 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.
However, even a diversified factor portfolio has not been particularly attractive in recent years when reviewing the returns of an equal-weighted multi-factor portfolio, which has also generated a negative performance in 1H 2021. Given that all factors except Value made losses, this is not particularly surprising.
