Quantitative Strategies

In mid-2013 we developed a multi-factor model to select individual REITs, figuring that we could exploit an area of the market that is uncrowded from a factor and quantitative standpoint. The results have been outstanding, with the buy-rated securities outperforming the sell-rated securities by 45% since the model went live.

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With the exception of Low Volatility and Profitability, all other factor categories produced positive factor performance in July. The month was eventful, however, as Momentum produced a +4% spread through July 12th, only to give up more than half of that advantage as interest rates rolled back over.

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Factors were impacted in June by: 1) Information Technology underperformance; 2) Financials’ renewed strength; and, 3) defensive and low volatility stocks lagging.

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Value can’t catch a break in 2017; every month has produced a negative performance spread. Price-to-Book has been the worst single Value factor this year, hurt by the heavy Energy and Financials weight in its cheap quintile.

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Value has taken its lumps to start 2017, but is it really that bad for the factor and its dedicated followers?

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

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After performing well since the 2009 meltdown, Momentum is having its first noticeably poor year. The magnitude of the underperformance is in line with other past years of poor performance. Materials and Energy have been the main drivers.

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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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Factor performance was muted prior to the vote; it turned volatile in the remaining days of June following. Momentum was the only factor to work before and after June 23rd — the day of the Brexit vote.

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In a reversal of factor performance, Value underperformed while everything else worked well. 

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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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Momentum reversed in February, primarily due to rallying Materials stocks. Value and Profitability both performed well.

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While most factors performed well during the January sell-off, those providing stability worked the best. Low Volatility, Profitability, and Size were notable outperformers.

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Despite one of its worst five-day performance stretches in early October, the Momentum factor bounced back nicely and performed well the rest of the month.

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The Short Interest Ratio performs well as a factor; on both the long and short sides.

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Value and Profitability performed well during August. Market Cap was a surprise underperformer given the stock volatility.

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Energy And Materials Driving Momentum Volatility

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