Factor Olympics 2019
And the Winner is…
January 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- As in 2018, Low Volatility produced the best and Value the worst performance
- Value did not recover significantly further after a short rally in Q3 2019
- However, Momentum broke its upward trajectory since then
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 Q3 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 capitalisation 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.
The performance leadership is similar to the last decade with the Low Volatility and Quality factors exhibiting the highest returns, albeit less extreme in magnitude than in previous years. Value continued to generate negative returns and the performance accumulates to what can be considered a lost decade for investors focused on buying cheap and selling expensive stocks.
