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Factor Tilt Performance In April's Rebound

Ploutos profile picture


  • In past articles, I have illustrated for Seeking Alpha readers how seven factor tilts or alternative weighting schemes to the traditional large capitalization-weighted index have produced historical outperformance.
  • I hope a display of these returns and a brief discussion about why these factor tilts deviated from the broader market can help readers with their asset allocation decisions.
  • In the April rebound, factors that have lagged - value, equal-weighting, size - moved back to the forefront, at least in the short-run.
  • Low Volatility was the weakest performer in the rebound, and is now trailing on the year. Momentum and Quality lagged slightly in April, but have still outperformed over last 3-6 months.
  • Dissecting the sharp market move into its factor components could be useful to investors evaluating where to deploy capital.

The first quarter of 2020 saw the worst performance (-19.6%) since the dreaded fourth quarter of 2008 during the height of the Financial Crisis. April 2020 bounced back with the best monthly return (+12.8%) since January 1987. Beaten-down Value did even better, returning 14.6%. As the markets continue to price and re-price the economic impact of the shut-down aimed at slowing the spread of the virus, we are likely to continue to see heightened volatility.

The S&P 500 (SPY) has not been a bad place to be within equity markets during this particular crisis. The large cap index is populated largely by companies with the scale to weather an economic dislocation, and the balance sheet heft to ensure that a reduction in near-term liquidity does not impair the franchise's longer-term value. Throw in a 25.5% weight to Tech, a 15.3% weight to Healthcare, and a 4.0% weight to e-commerce and cloud computing giant Amazon (AMZN), and the capitalization-weighted index has been allocated well from an industry perspective for a public health crisis that has led to an uptick in online work and e-commerce.

Over longer-time intervals, the capitalization-weighted large cap index has still lagged a number of factor tilt strategies. While it may seem like the biggest companies only get bigger in the current episode, owning large cap companies weighted by their market capitalization has not delivered outpeformance over the course of several business cycles. These alternative factors to the traditional capitalization-weighting outperform in different parts of the economic cycle, and this series aims to discuss what has worked, and what might be more likely to work, moving forward.

In the table below, I have listed the performance of seven factor tilts and the capitalization-weighted benchmark over trailing 1, 3, and 6 months, as well as, 1, 3, 5, 10, and 20 years. Information below is from the underlying indices

This article was written by

Ploutos profile picture
Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s Disclosure: I am/we are long RPV, IJR, SPLV, NOBL, RSP, MTUM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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