2019_01_06 — “Stock Market Factors in 2018, Mostly Underperformed”

January 6, 2019

Stock Market Factors in 2018, Mostly Underperformed

Stock Market Factors (a.k.a., Smart Beta) in 2018, mostly underperformed

The market shall be telling this with a sigh
Somewhere ages and ages hence:
Multiple factors diverged in a wood, and it —
It took the one most traveled by,
And that has made all the difference *

Intensively researched and known stock market beating factors that are supposed to outperform over long market cycles mostly underperformed in 2018. “Factors” (also known as smart beta) are considered the drivers of stock performance that can help explain an investment portfolio’s risk-return profile; value, size, momentum, low volatility, quality, and dividend yield are commonly sited as factors that play a role in performance.

In 2018, value, momentum, and size factors all produced negative returns for global developed market stock portfolios. In addition, 2018 was a rare year when multi-factor portfolios were also negative; multi-factor portfolios are supposed to either optimize or take the best prospects from multiple factors. Quality, high dividend yield, and low volatility were the factors that notched positive returns in 2018.

• Value notably continued its decline since peak relative performance in 2009
• Small stocks (representing the size factor) underperformed larger multinational companies that many thought would suffer more from international trade tensions
• The momentum factor nosedived with the rapid price decline of technology stocks and had mixed to negative performance based on how its calculated

U.S. factor performance is similar to the global story. Value and momentum factors were the most negative while size and multi-factor were also negative; the Russel 2000 experienced its fourth worst performance in Russel history. Low volatility was the best performing factor in the U.S. and the quality factor was also positive. European factor performance was largely similar. True to form, the markets took the road most travelled by and tended to disappoint the most people because if ETF weightings are an indicator, value ETFs held six times the assets of low volatility ETFs — and that has made all the difference.

Note: Amongst global markets, utilities and healthcare tended to be the best performing industries of 2018 according to MSCI sector data.

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*The stanza has been radically adapted from “The Road Not Taken” by Robert Frost. For those that wish to read the original poem, here it is:

The Road Not Taken
by Robert Frost

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I —
I took the one less traveled by,
And that has made all the difference.

~

Michael Ashley Schulman, CFA

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Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The views and opinions referenced are as of the date of initial publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each person’s or investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.