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 size (small-cap stocks) as the Russell 2000 outperformed the S&P 500 index by 2.1%. The growth factor also turned in a strong month, as it outperformed by 1.4%.

The worst factors over the past month were momentum, which underperformed the S&P 500 by 5.6%, and low-volatility, which lost 7.8% relative to the index. 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 February 10, 2023. Transaction costs are not considered.

On a trailing 3-month basis (gray bars in Fig. 1), the value factor continues to lead the pack, with 2.3% of relative outperformance. Looking out over the past 12 months, low-volatility and value continue to pace the group of factors, while growth continues to be a laggard. Over the past 12 months, value has outperformed the index by 8.0%, while growth has lagged by 7.9%.

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 February 10, 2023. Transaction costs are not considered.

From the start of 2020 through February 10, 2023, the dynamic multi-factor strategy returned 30.6%. Over that same period, the S&P 500 has gained 26.6%, for 4.0% 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 January 2023. Transaction costs are not considered.

The dynamic strategy underperformed the S&P 500 in January by 1.8%. An overweight toward low-volatility and an underweight away from growth were the main causes for the dynamic factor strategy’s poor performance over the past month.

Dynamic Model: Factor Weights for February

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 remains overweight the value and low-volatility factors. It has underweights away from the growth and momentum factors.

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 February

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