Key Takeaways

  • The year-long trend in factor underperformance continued during November. All five factors (value, quality, momentum, low volatility and size) underperformed their benchmarks, with value the worst of the group, as it posted a 4.8% loss for the month.
  • Since the start of 2020, the dynamically weighted factor portfolio has outperformed the S&P 500 by a total of 5.7%.
  • After the latest rebalance, the dynamic factor portfolio is now overweight small-caps and growth while being underweight low volatility and momentum.

November Performance Review

Poor factor performance continued in November, as all five factors underperformed their respective benchmarks (see gray bars in Fig. 1). Losses were led by the value factor, which underperformed by 4.8% and by the size factor, which saw small-cap stocks underperform larger names by 3.4%. In fact, over the past 12 months, value has now underperformed by 12.4%, while the low volatility premium has underperformed by 10.7%. The “best” factors over the past 12 months have been quality and momentum, which “only” lost 1.0% and 2.6%, respectively, over that period.

Fig. 1 – Recent Performance of Factors

December 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

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

From the start of 2020 through December 10, 2021, the dynamic multi-factor strategy returned 51.5%. Over that same period, the S&P 500 gained 45.8%, for 5.7% of outperformance. Fig. 3 below shows the monthly performance of the dynamic strategy vs. that of the S&P 500 over the past two years. In the majority of months over this period, the dynamic strategy has generated positive excess return.

Fig. 3 – Dynamic Strategy Recent Relative Performance

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

Factor Weights for December

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 size (small-cap) and growth while being underweight low volatility and momentum.

Fig. 4 – Factor Weights in Dynamic Multi-Factor Portfolio (as of December 10, 2021)

December Factor Commentary
Source: Bloomberg, S&P, Russell
Disclosures (show)

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