Posted inInvestment

Value factor shines as past winners turn into losers

Value factor indices generated an outperformance between 2.2% (Japan) and 8% (EM) in 2016, according to MSCI data. 2016 was the first year of outperformance of value stocks since the global financial crisis.

There was another factor outperforming the plain vanilla index across all regions: high-dividend stocks. The outperformance of dividend was highest in Japan (+6.9%), and lowest in Europe (+1.3%).

Minimum-volatility, the single most popular factor with investors over the past few years, saw a reversal of fortunes, however. Low-vol had a tough year, underperforming its reference benchmark in all regions except Japan, with EM low-vol stocks (-7.3%) hit hardest. The quality factor, which has a strong correlation with low-vol, also underperformed significantly after two years of strong outperformance.

Though 2016 was an eventful year with many political events impacting markets, momentum was not a winning strategy as trades kept reversing quickly over the course of the year. Momentum underperformed most strongly in Japan (-10.7%), EM (-7%) and the US (-6.7%).

 ource Source: MSCI

So what will be the winning factors of 2017? While there is a case to make that the value rally will persist well into this year, it’s a very difficult call to make if you take long-term valuations as a guide. Based on current valuations, no factor currently looks cheap relative to history. Moreover, all factors trade around their historical valuation average, except high-dividend, which is expensive (see chart).    

Part of the Bonhill Group.