We hope that the new year has treated you well so far.
The first month of 2017 was a bullish one, more so for tech investors than for the broader market. The rally was helped by expectations that there wouldn't be quite as many Fed hikes as were priced in at the end of 2016, and the US dollar also saw a reversal after strengthening against many currencies in 2016. Apart from Estimate Dispersion, %4 Week Total Return (AKA Reversal Factor) and 2Y Forward Growth, most factors saw poor performance. So while bullish investors may be celebrating the start of 2016, those with a bit too much exposure to classic factors like Value or the newly popular Beta and Volatility factors may find their performance lagging the indices.
*Indicates a low – high polarity. Other factors have a high – low polarity.
While those with exposure to Beta, Volatility or the value oriented factors of Book/Price and Earnings/Price factors don’t expect great returns in up markets, investors who are long high-dividend stocks or companies with a high ROE are likely to be more surprised by lagging results.
When looking at the realized volatility of these factors, we see that it looks relatively similar to last year:
These factors currently exhibit lower volatility, but that’s mostly because this one month excludes any market panics or large quant panics. The volatility of the more volatile factors look similar to the volatility of the S&P 500. Looking at the volatility in context of this month’s returns, it’s interesting the factor with the second lowest volatility, 2Y Forward Growth at 2.1% annualized volatility, had monthly returns of 1.5%.
As a reminder, Omega Point clients have access to regularly updated Factor Return data.
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Stay tuned for an update on our newest feature - the Overview page, with risk and return attribution.
The Omega Point Team