Factor Performance Review

We track the performance of six factors (growth, quality, low-volatility, momentum, size, and value) as part of our multi-factor strategy. Over the past month, the best factor was growth, which outperformed the S&P 500 index by 1.5%. The growth factor was by far the best-performing factor, the only other factor that turned in positive performance for the month was low-volatility, which produced small outperformance of 0.4%.

The other four factors underperformed, with momentum seeing the worst performance, as it underperformed the S&P 500 by 5.3% during November. The size and value factors also underperformed. Performance for each of the six factors over the past month is shown as the dark blue bars in Fig. 1.

Note: Shows the performance of six factors (growth, quality, low-volatility, momentum, size, and value) relative to the S&P 500. Dark blue bars indicate performance over the past month, grey bars over the past 3 months, and light blue bars over the past 12 months. Analysis runs through December 9, 2022. Transaction costs are not considered.

On a trailing 3-month basis (gray bars in Fig. 1), momentum, quality and value have shown the best relative performance. Looking out over the past 12 months, low-volatility and value have done best, as they have outperformed the S&P 500 by 15.0% and 13.0% respectively over that period. The worst factor has been growth, which has now underperformed the S&P 500 by 12.4% over the past year.

Multi-Factor Portfolio Performance Review

We track a dynamic multi-factor portfolio that tilts 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.

Note: Shows the cumulative returns of the dynamic multi-factor investing strategy. Strategy assigns factor weights using the inverse of 52-week trailing return volatility, overweighting (underweighting) the factor with the best (worst) trailing momentum. Strategy is rebalanced monthly. Period of analysis is from November 1997 through December 9, 2022. Transaction costs are not considered.

From the start of 2020 through December 9, 2022, the dynamic multi-factor strategy returned 26.5%. Over that same period, the S&P 500 has gained 21.8%, for 4.8% of outperformance for the dynamic multi-factor strategy. Fig. 3 below shows the monthly performance of the dynamic strategy vs. the S&P 500 since the start of 2020.

Note: Shows the monthly returns of the dynamic multi-factor investing strategy relative to the S&P 500 index. Strategy assigns factor weights using the inverse of 52-week trailing return volatility, overweighting (underweighting) the factor with the best (worst) trailing momentum. Strategy is rebalanced monthly. Period of analysis is from January 2020 through November 2022. Transaction costs are not considered.

The dynamic strategy struggled mightily in November, underperforming the S&P 500 by 2.1% for the month. An overweight toward momentum and an underweight away from growth both contributed to the dynamic factor strategy’s underperformance during November.

Dynamic Model: Factor Weights for December

Fig. 4 below indicates the latest weights assigned to each of the six factors in the dynamic multi-factor strategy. For the next month, the dynamic strategy is overweight the quality and value factors while remaining underweight low-volatility and growth.

Factor Performance Review

Fig. 1 – Recent Performance of Factors

Multi-Factor Portfolio Performance Review

Fig. 2 – Dynamic Multi-Factor Strategy Relative Performance

Fig. 3 – Dynamic Strategy Recent Relative Performance

Dynamic Model: Factor Weights for December

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