What Investing Factors Have Worked The Best For Equities Over The Last Year?

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Includes: DIA, QQQ, SPY
by: ValueWalk

By Bryce Coward, CFA – Gavekal Capital Blog

Factor investing is a well known and utilized means that investors use to allocate capital in hopes of outperforming the market over long stretches. It's also known that no factor works all the time, and factors go into and out of favor with what can be a menacing frequency. With that said, what factors have worked the best for equity investors over the last year as the market has meandered around all-time highs and settled to multi-years all in twelve short months?

Our factor work shows the following (with tables below):

  • Growth has outperformed value
  • High quality has outperformed low quality
  • Low beta has outperformed high beta
  • High correlation to the euro has outperformed low correlation to the euro
  • Low correlation to oil has outperformed high correlation to oil
  • Low correlation to bond yields has outperformed high correlation to bond yields

These results can be summed up in the following way: over the last year the market has favored high quality growth companies with little regard to valuation and is treating these companies as bond substitutes as oil's deflationary impacts permeate bond yields.

And here are our factor regression tables. Each table divides companies into deciles based on their ranking for each specific factor, and then calculates the performance for each decile. At the bottom of the tables we show the r-squared between the deciles and the performance.

Companies in the highest price to book decile have outperformed companies in the lowest price to book decile by 37.5% over the last year with an r-squared of 88%:

Factor investing in Equities

Companies in the highest EPS growth decile have outperformed companies in the lowest EPS growth decile by 24.6%% over the last year with an r-squared of 89%:

Companies in the lowest long-term debt to capital decile have outperformed companies in the highest long-term debt to capital decile by 15.2%% over the last year with an r-squared of 57%:

Companies in the lowest beta decile have outperformed companies in the highest beta decile by 38.7%% over the last year with an r-squared of 93%:

Companies in the highest euro correlation decile have outperformed companies in the lowest euro correlation decile by 17.4%% over the last year with an r-squared of 46%:

Companies in the lowest oil correlation decile have outperformed companies in the highest oil correlation decile by 43.5%% over the last year with an r-squared of 94%:

Companies in the lowest t-bond correlation decile have outperformed companies in the highest t-bond correlation decile by 23.0% over the last year with an r-squared of 83% (in other words, companies that go up in price and yields fall have outperformed those that go down in price as yields fall):