Continuing our series on monthly factor returns, here is a summary for November.
*Asterisk indicates that the factor polarity is low-high. All other factors are high-low.
On a year to date basis, momentum has continued to lag while the Four Week Reversal factor is up over 10%. It has been a year of reversals and not a year for simple trend following.
This November, the quants who bet on the relative outperformance of low PE companies among non-financials probably aren’t too happy. Almost as bad are those who are focused on low Beta stocks. Given that the market was up this month it's not their underperformance, but the magnitude that is surprising.
High dividend stocks significantly outperformed low dividend stocks. In a year with significant uncertainty and companies making seemingly ridiculous acquisitions, many investors like the idea of capital being returned directly to shareholders.
Sometimes these factors outperform because of improving fundamentals and sometimes because an idea is getting popular. Last year, low beta and low volatility funds were entering the mainstream, and they’ve since underperformed this year. Those thinking towards next year’s allocations might want to give some extra consideration towards figuring out if high dividend stocks have seen improving fundamentals or if investors have turned to dividend stocks in this current environment.
When we introduced short interest we made explicit its negative correlation with the market. It’s good to know which factors are likely to outperform in which market regimes. This table gives us the correlation of factor returns to the S&P 500 since 2013.
*Asterisk again denotes a low-high polarity.
Low beta and low volatility strategies are also negatively correlated to the market. Especially negatively correlated is the E/P factor excluding financials factor. This high negative correlation is partially an artifact of timing. A secular bull market in technology has meant that the growth stocks this factor is short have done quite well. When a rally in technology drags the market upwards, growth stocks outperform and this factor lags.
Outside of dividends, none of the factors have a strong positive correlation with the market. The reversal factor is slightly positive, which is expected because one half of that factor is being long companies that have recently disappointed and fallen the most. When markets go up, the stocks that investors have been panicking about will often rebound more quickly than others.
Those worried about outperforming in downturns might want to give a little more weight to some of these negatively correlated factors. There are two important caveats. First is that exposure to these factors absent significant alpha or outperformance by these factors means lagging performance in an up-trending market. The second, as discussed above, is that this popularity may be part of the reason why they have underperformed this year.
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The Omega Point Team