Factor Olympics Q3 2022
And the winner is…
October 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Value is leading the performance scoreboard in YTD 2022
- Low volatility is the worst-performing factor
- Oddly, the value and low volatility factors are strongly positively correlated
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 Q2 2022).
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 (try Finominal’s Alpha Analyzer for a factor exposure analysis).
The performance of an equal-weighted multi-factor portfolio was positive as of the first half of 2022, but turned negative in the third quarter. Primarily this can be explained by the value, momentum, and low volatility factors peaking at the end of July, and then giving up most of their positive returns thereafter.
