Factor Olympics Q3 2024
And the winner is…
October 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- The losers of last year, ie momentum and low volatility, became the winners of this year
- Low volatility performed the best, size the worst
- Smart beta products do not provide the same exposures as market-neutral multi-factor funds
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.
METHODOLOGY
Our factors are created by constructing long-short beta-neutral portfolios of the top and bottom 30% of stocks. 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 EXCESS 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.
We observe a continuation of last year’s trends in factor performance for the value and size factors, but also a significant rotation of momentum and low volatility going from the worst- to the best-performing factors in year-to-date 2024.
A theoretical portfolio providing equal-weighted exposure to all five factors would have generated 2.6% year-to-date.
