November Factor Commentary
Key Takeaways
- October was a difficult month for factors. Four of the five factors underperformed, with value losing 4.6% in October.
- The dynamically weighted factor portfolio has continued to outperform the S&P 500, as it has outperformed the broad index by 0.5% year-to-date.
- For November, the dynamic factor portfolio is overweight momentum while being underweight low-volatility.
October Performance Review
October was a difficult month for factor performance, as four of the five factors underperformed their respective benchmarks (see gray bars in Fig. 1). Over the past month, only momentum turned in a positive return and it was a small contribution of 0.4%. Of the remaining four factors, value was the worst, underperforming its benchmark by 4.6%. The low volatility and size factors also underperformed in October, with low volatility underperforming by 2.3% and small-caps underperforming large-caps by 2.7%.
Fig. 1 – Recent Performance of Factors and Multi-Factor Portfolios
October continued the struggle for factors, as now only one of the five factors have outperformed over the past 3 months (momentum, see blue bars in Fig. 1) and over the past 12 months (small-caps over large-caps, see orange bars in Fig. 1).
Multi-Factor Portfolio Performance Review
As described in our introductory factor note, we construct a multi-factor portfolio using the factors listed above. We further introduce a dynamic tilt that tilts weight toward (away from) the factors with the best (worst) recent performance.
We are making several adjustments to the dynamic factor-tilting strategy. Originally, we measured the performance of the dynamic multi-factor strategy against a static combination of factors. Moving forward, we will evaluate the dynamic factor tilting strategy directly against the S&P 500. The dynamic multi-factor strategy will remain a long-only strategy.
We are also adding a growth factor to the dynamic multi-factor strategy. Value and growth each represent subsets of the overall S&P 500. Since we cannot short factors, excluding growth from the list of factors means the dynamic multi-factor strategy will always have a value tilt. To rectify this situation, and allow for the portfolio to take a position against value, we add a growth factor to the strategy. Thus, the multi-factor strategy will now consist of six factors: value, quality, low-volatility, momentum, small-cap and growth. It will continue to tilt weight among these six factors.
The other adjustment we make is to adjust the rebalance date for the strategy from the end of the month. We will instead rebalance the strategy several days after the start of the month, to more closely correspond to the publication dates of the regular factor updates. Fig. 2 shows the cumulative performance of the dynamic multi-factor strategy relative to the S&P 500 since 1997, after accounting for these updates (addition of growth factor, adjustment of rebalance dates).
Fig. 2 – Dynamic Multi-Factor Strategy Performance
Year-to-date, the dynamic multi-factor strategy has returned 27.4%, while the S&P 500 has returned 26.9%; a modest 0.5% outperformance. By contrast, the dynamic multi-factor strategy returned 19.1% in 2020, vs. 16.3% for the S&P 500, for 2.8% of outperformance.
Factor Weights for November
Fig. 3 below indicates the weights assigned to each of the six factors in the dynamic multi-factor portfolio for November. The model is overweight momentum while being underweight low-volatility.
Fig. 3 – Factor Weights in Dynamic Multi-Factor Portfolio (as of November 5, 2021)
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