Factors

With the “Trump Trade” in question, investors have been flocking to companies delivering tangible results.

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Low Volatility was in favor once again during February after struggling the previous month. Starting in September, the factor has continuously reversed the previous month’s performance.

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Momentum factors are effective in differentiating EM sector performance, with High Momentum significantly outperforming Low Momentum. Unfortunately, there is a lack of investable EM sector vehicles.

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While factors do offer excess return they are by no means winners in all seasons. Our findings show that factor returns are cyclical, volatile, and unstable over time.

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Factor performance during 2016 is the reverse of that of 2014-2015. Quants and smart beta funds focusing solely on Value have enjoyed the year, while multi-factor approaches have struggled. Value has been the only factor that has provided positive performance this year.

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Also known as smart beta or strategic beta, factor investing has become the hottest portfolio management trend in the last five years. The smart beta space exceeds $600 billion in assets under management.

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Value, Growth, and Profitability were all negative, while Momentum turned around its recent negative performance streak.

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Value was the only factor category that worked during July. Being the one factor that currently offers rising interest rate exposure, Value has performed inversely to every other category for most of 2016.

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Similar to March, Value was the only factor to perform well in April. Profitability, Momentum, and Volatility all had spreads worse than –5%. 

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With the exception of Value, March was a bad month for quantitative factor performance. Every other factor category we follow underperformed, with Momentum posting its second consecutive –5% spread.

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For the third consecutive year (thus far), quantitative factors worked best within the Materials sector. Energy also saw success as the decline in oil hurt the same stocks as in 2014. Factors were least effective in Health Care and Telecom.

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Looking at year-to-date factor performance, Sentiment is the best performing; Momentum and Growth have also performed well.

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Momentum and Sentiment bounced back in May, while Value and Quality struggled.

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Factor performance reversed course again in April, with the spike in oil driving most of the volatility.

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Factor performance reversed course in February, with most factors performing the opposite of how they have over the last six months.

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Factor performance in January was very similar to how the year ended, with Momentum doing very well and Value struggling.

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Six of the seven factor categories we track have turned in positive performance so far in 2014; Value is the exception. Lost in the numbers is that most of the value has come from the short quintiles, so it has been hard for managers to take advantage of this trend.

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During another volatile month for the market, factor performance remained fairly consistent, with Profitability, Quality, and Momentum all working again. Value struggled for the second consecutive month and performed poorly during both the decline and reversal in October.

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 We additionally compare factor results YTD to that of 2013 YTD; shift to Large Caps should have staying power.

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Factor performance over the first three weeks of July was very different than the last week, which produced a challenging month-end for quantitative investors.

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