Factor Olympics Q4 2021
And the winner is…
January 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- 2021 was a year of moderate factor performance
- Value, Quality, and Low Volatility factors generated positive returns
- Momentum and Size were negative
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 Q3 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 (try Finominal’s Alpha Analyzer for a factor exposure analysis).
The performance of an equal-weighted multi-factor portfolio was negative as of the end of the third quarter of 2021, but turned slightly positive as the Value, Quality, and Low Volatility factors all rallied in the fourth quarter. The returns of factors ranged between +10% and -10%, which is relatively moderate compared to previous years.
