Factor Olympics Q3 2018
And the Winner is…
October 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Global factor performance in the first three quarters of 2018 is comparable to 2017
- However, regional factor performance diverges, reflecting changes in monetary and trade policies
- Low Volatility leads and Value lags
INTRODUCTION
We present the performance of seven well-known factors on an annual basis for the last 10 years and the first three quarters of 2018. It is worth mentioning that not all factors have strong academic support, e.g. Growth lacks a long-term track record of positive excess returns; however, is still a widely-followed investment style (read Factor Olympics 1H 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 (LONG / SHORT): GLOBAL
The table below shows the 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 first three quarters of 2018 shows largely a continuation of 2017, i.e. Low Volatility, Quality, Momentum and Growth generated positive returns while Size, Dividend Yield and Value were negative. Factors often exhibit the same trends across markets, but 2018 can be characterized by asynchronous factor performance, which is explained by divergent central bank policies and geopolitical risks.
