Popularised by Eugene Fama and Ken French in the 1990s, hard-wired stock ‘factors’ are now entrenched in investment theory and practice.
The famed Fama-French model underpins the US$630 billion plus Dimensional Fund Advisors business, for example, while many large institutional investors, including the NZ Superannuation Fund, have made large allocations to factor-based strategies.
But the classic five factors of antiquity – size, value, quality, momentum and low volatility – have a shifty history, according to a new study published by Portfolio Management Research.
The paper authored by BlackRock investment specialist, Andrew Ang, found a marked difference in factor trend behaviours in the 21st century compared to the previous four decades.
Ang, head of factors, sustainable and solutions for BlackRock, found value, momentum and low volatility have been on a lower return trajectory since 2000 while size and quality have trended up relative to the 20th century.
Value, in particular, was in for a drubbing this century, Ang says, as both short- and long-term trends conspired against the factor.
“The recent weaker performance of the value factor in the 21st century, including the value drawdown over 2017 to 2022, which is the worst value drawdown ever experienced, can be attributed to both a decreasing trend component and downturns in cyclical components,” he says.
Momentum and low-volatility have also trended down since 2000, although the latter factor has other redeeming features, the report says.
“While low-volatility stocks have continued to significantly reduce risk by approximately one-half to one-third compared with high-volatility stocks in both the 20th and 21st centuries, the low-volatility factor has experienced longer durations of returns from a regime with a relatively low mean.”
Size and quality have been the stand-out factors this century based on the multiple statistical techniques Ang employed in the study.
However, he says while data shows the duration and intensity of trends across the five factors has varied considerably century-on-century, it’s not clear why.
“… the deeper question is what is driving these changes in trends and cycles?… I cannot speak directly to the underlying economic mechanisms that produce predictable short- or long-term variation in style factor returns, such as from macro variables…, institutional features of markets such as constraints that induce investors to act in certain ways…, or investor behavioral biases.”