Key Takeaways
- Factor performance continued its trends from December into January, with the value and quality factors performing best, and growth and size (small-cap stocks) performing worst.
- The outperformance of value relative to growth has reached levels not seen since early 2017, the last time the Fed was raising rates.
- Our dynamically weighted factor portfolio underperformed the S&P 500 by 0.2% in January. Since the start of 2020, this strategy has outperformed the S&P 500 by a total of 4.1%.
- After the latest rebalance, the dynamic factor portfolio is now overweight quality and low-volatility while being underweight size (small-cap) and growth.
Factor Performance Review
Factor dynamics that existed in December continued into January, as December’s winners continued to outperform, while underperformers during December continued to struggle. Of the six factors we track (growth, quality, low-volatility, momentum, size and value) – value and quality outperformed their benchmarks by the most over the past month (see gray bars in Fig. 1), with value outperforming by 1.0% and quality turning in 0.6% of relative outperformance. The size factor (small-caps over large-caps) performed the worst in January, as it underperformed by 4.5%.
Over the 12-month period ending January 31, value has outperformed growth by 1.5%. The last time value enjoyed this degree of outperformance relative to growth over a 12-month period was in early 2017 – the last time the Fed had embarked on a consistent rate-hike agenda.
The size factor (small-caps over large-caps) has now underperformed by nearly 24% on a trailing 12-month basis. The poor performance of the small-cap factor over the past year has been a headwind for the multi-factor strategies we track.
Fig. 1 – Recent Performance of Factors
Multi-Factor Portfolio Performance Review
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
From the start of 2020 through February 4, 2022, the dynamic multi-factor strategy returned 43.4%. Over that same period, the S&P 500 gained 39.3%, for 4.1% of outperformance. Fig. 3 below shows the monthly performance of the dynamic strategy vs. the S&P 500 since the start of 2020. The dynamic strategy again improved in January, but still underperformed the S&P 500 by 0.2%, driven lower by the continued underperformance of small-cap stocks.
Fig. 3 – Dynamic Strategy Recent Relative Performance
Factor Weights for February
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 quality and low-volatility factors while being underweight size (small-cap) and growth.
Fig. 4 – Updated Factor Weights in Dynamic Multi-Factor Portfolio
