Equity Factor Investing: Historical Perspective of Recent Performance

15 Pages Posted: 9 Jan 2021

See all articles by Benoit Bellone

Benoit Bellone

BNP Paribas Asset Management

Thomas Heckel

BNP Paribas Asset Management

François Soupé

BNP Paribas Asset Management

Raul Leote de Carvalho

BNP Paribas Asset Management

Date Written: October 23, 2020

Abstract

We investigate the possible sources of the recent underperformance of multi-factor equity strategies reported by many equity quant managers. We considered the value, quality, low risk and momentum factor styles in mid to large-capitalisation World, USA and European stock universes. When looking at the historical performance of the factors and multi-factor combinations, we find that this is not the first time factor strategies have experienced a period of poor performance. The tech bubble of the late 90s and the great financial crisis of 2008 were other difficult periods for some of the factors and multi-factor combinations. What is different this time around is that poor performance can be mainly attributed to the underperformance of value factors. We also find that long-only portfolios, which tend to be exposed to smaller-capitalisation stocks in their construction, have suffered additionally from that exposure. Not only did the size factor fail to generate a premium in mid to large-capitalisation universes in the long term, but also the recent underperformance of smaller-capitalisation stocks and the consequent increase in the concentration of benchmarks was an additional source of difficulty in long-only benchmarked portfolios. Finally, we discuss the impact of a number of choices available to managers of factor strategies and show that the neutralisation of sectors, neutralisation of beta, control of tracking error and diversification of factors in styles play an important role in improving the performance of equity factor strategies.

Keywords: Factor Investing, Equities, Smart Beta, Value, Momentum, Quality, Low Volatility

JEL Classification: G11, G12, G14, E44

Suggested Citation

Bellone, Benoit and Heckel, Thomas and Soupé, François and Carvalho, Raul Leote de, Equity Factor Investing: Historical Perspective of Recent Performance (October 23, 2020). Available at SSRN: https://ssrn.com/abstract=3732113 or http://dx.doi.org/10.2139/ssrn.3732113

Benoit Bellone

BNP Paribas Asset Management ( email )

14 rue Bergère
Paris, 75009
France

Thomas Heckel

BNP Paribas Asset Management ( email )

Paris
France

François Soupé

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France

Raul Leote de Carvalho (Contact Author)

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France
0033158972183 (Phone)

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