The smart guys at Newfound Research highlighted a few key points from the 2019 market performance in their annual review. A key one for me was the significant lag in “factor” performance, i.e., the academically-supported expected performance premium to be garnered from key underlying traits of stocks. The major “factors” that underperformed were stocks with a high trait of value, size, momentum, and low volatility; only the quality factor was close to break-even versus the S&P 500.
They go on to say that periods like this are not a huge negative outlier. But, what is huge is the fact that all of them underperformed at the same time during the same time horizon!
So, what is the lesson here? My investment philosophy is grounded in a globally-diversified, multi-asset long term strategic approach to capture market returns and manage risk. Exposures to the well-documented “factor” space is part of that viewpoint. It is unrealistic to expect each and every asset allocation choice to outperform each and every period. In fact, due to normal market volatility and a rotation of returns, I would not be surprised to see factors outperform core holdings in the future; we shall see!