Key Takeaways

  • Performance in factors shifted over the past month, as prior laggards (value and low-volatility) did best while past winners (growth) underperformed.
  • Our dynamically weighted factor portfolio saw slight underperformance of 0.3% in December. Since the start of 2020, this strategy has outperformed the S&P 500 by a total of 5.0%.
  • After the latest rebalance, the dynamic factor portfolio is now overweight growth and momentum while being underweight size (small-cap) and value.


Factor Performance Review

Factor performance underwent a significant shift during the past month, as the factors that had done well turned in poor performance, while the laggards enjoyed strong performance. Of the six factors we track (growth, quality, low-volatility, momentum, size and value) value and low-volatility outperformed their benchmarks by the most over the past month (see gray bars in Fig. 1). Value led the way, returning 3.5% over the past four weeks, while low-volatility saw outperformance of 2.4%. Among the laggards, the growth and size factors had the worst performances over the past month, underperforming by 3.1% and 2.1%, respectively.

Over the past year, growth is still the best factor, returning 1.5% relative to its benchmark (see orange bars in Fig. 1). The only other factor that saw outperformance on a trailing 12-month basis was quality, which returned 0.9% relative to the S&P 500 over this period.

Fig. 1 – Recent Performance of Factors

January Factor Commentary
Source: Bloomberg, S&P, Russell

Multi-Factor Portfolio Performance Review

The poor performance of factors over the past 12 months means that factor investors, in general, have faced significant headwinds to their strategies. We apply a dynamic tilting mechanism to a multi-factor portfolio that adjusts weight toward the factors with the best recent performance, and away from the factors with the worst recent performance. Fig. 2 shows the cumulative performance of this dynamic multi-factor strategy relative to the S&P 500 since 1997.

Fig. 2 – Dynamic Multi-Factor Strategy Relative Performance

January Factor Commentary
Source: Bloomberg, S&P, Russell

From the start of 2020 through January 7, 2022, the dynamic multi-factor strategy returned 49.7%. Over that same period, the S&P 500 gained 44.8%, for 5.0% of outperformance. Fig. 3 below shows the monthly performance of the dynamic strategy vs. the S&P 500 since the start of 2020. After struggling in November, the dynamic strategy did better, but still underperformed by 0.3% in December. Note that in the majority of months since 2020, the dynamic strategy has generated positive excess return.

Fig. 3 – Dynamic Strategy Recent Relative Performance

January Factor Commentary
Source: Bloomberg, S&P, Russell

Factor Weights for January

Fig. 4 below indicates the latest weights assigned to each of the six factors in the dynamic multi-factor strategy. The strategy is currently overweight the growth and momentum factors while being underweight size (small-cap) and value.

Fig. 4 – Updated Factor Weights in Dynamic Multi-Factor Portfolio

January Factor Commentary
Source: Bloomberg, S&P, Russell

Disclosures (show)

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