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 value, which outperformed the S&P 500 index by 3.0%. The quality, low-volatility and momentum factors also all outperformed over the past month, outperforming the index by 1.8%, 1.7% and 1.5%, respectively.

After strong performance during November, the growth factor saw its performance reverse over the past month, as it was by far the worst-performing factor, underperforming the S&P 500 by 2.8% for the month. 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 January 6, 2023. Transaction costs are not considered.

On a trailing 3-month basis (gray bars in Fig. 1), the value factor has shown the best relative performance, while growth has lagged. Looking out over the past 12 months, low-volatility and value have done best, while growth continues to be a laggard. Over the past 12 months, the growth factor has underperformed the S&P 500 by 11.6%.

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 January 6, 2023. Transaction costs are not considered.

From the start of 2020 through January 6, 2023, the dynamic multi-factor strategy returned 27.7%. Over that same period, the S&P 500 has gained 20.6%, for 7.2% 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 December 2022. Transaction costs are not considered.

After underperforming in November, the dynamic strategy rebounded in December, as it turned in 0.9% of return on top of the S&P 500. Overweighting the size and value factors, and an underweight away from growth contributed to the dynamic factor strategy’s positive performance during December. During 2022, the dynamic factor strategy outperformed the overall S&P 500 by 1.4%.

Dynamic Model: Factor Weights for January

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 value and low-volatility factors while remaining underweight size (small-cap) 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 January

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