{"id":40882023,"date":"2021-09-17T12:27:58","date_gmt":"2021-09-17T06:57:58","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/?p=40882023"},"modified":"2021-09-20T12:20:45","modified_gmt":"2021-09-20T06:50:45","slug":"factor-momentum-performance-update","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2021\/09\/17\/factor-momentum-performance-update\/","title":{"rendered":"Factor Momentum Performance Update"},"content":{"rendered":"\n<p>Factor performance tends to be sticky. If Value, Momentum, Quality, etc. out-performed in the recent past, they continue to out-perform in the near-future. <\/p>\n\n\n\n<p>AQR wrote a paper on it back in January 2019: <a href=\"https:\/\/www.aqr.com\/Insights\/Research\/Working-Paper\/Factor-Momentum-Everywhere\" target=\"_blank\" rel=\"noreferrer noopener\">Factor Momentum Everywhere<\/a>. More recently, the folks at Research Affiliates extended the research in their <a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3116974\" target=\"_blank\" rel=\"noreferrer noopener\">Factor Momentum<\/a> paper. Based on AQR&#8217;s research, we setup a <a href=\"https:\/\/stockviz.biz\/2019\/12\/12\/factor-momentum-everywhere\/\" target=\"_blank\" rel=\"noreferrer noopener\">portfolio<\/a> that mimics this for both US and Indian stocks in December 2019. We called it <a href=\"https:\/\/us.stockviz.biz\/theme-eq\/597A212F-62A9-45FA-A49A-3C6C074CA5B9\" target=\"_blank\" rel=\"noreferrer noopener\">Factor Momentum III<\/a> and <a href=\"https:\/\/stockviz.biz\/theme-eq\/5112F698-E8B0-491C-BFA4-F6CA47A6AEC8\" target=\"_blank\" rel=\"noreferrer noopener\">Model Momentum Theme<\/a>.<\/p>\n\n\n\n<p>The performance of the US portfolio has been gangbusters. It sidestepped the Corona Crash of 2020 and has been on a tear since then. The Indian experience, however, has been disappointing.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"585\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance-1024x585.png\" alt=\"\" class=\"wp-image-40882033\" srcset=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance-1024x585.png 1024w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance-300x171.png 300w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance-768x439.png 768w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance-250x143.png 250w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/us-factor.performance.png 1400w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>US Factor Momentum<\/figcaption><\/figure>\n\n\n\n<p>The Indian portfolio suffered from its inability to go into cash\/bonds during crashes. Being fully invested took a bite out of its overall performance.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"585\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance-1024x585.png\" alt=\"\" class=\"wp-image-40882043\" srcset=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance-1024x585.png 1024w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance-300x171.png 300w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance-768x439.png 768w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance-250x143.png 250w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/india-factor.performance.png 1400w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>India Factor Momentum<\/figcaption><\/figure>\n\n\n\n<p>The Indian version comes up short even if you compare its stats with its component factor portfolios.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"898\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-1024x898.png\" alt=\"\" class=\"wp-image-40882053\" srcset=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-1024x898.png 1024w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-300x263.png 300w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-768x674.png 768w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-1536x1347.png 1536w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-2048x1796.png 2048w, https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/2021\/09\/radar.factor-momentum-250x219.png 250w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>India Factor Momentum Statistics<\/figcaption><\/figure>\n\n\n\n<p>The intuition behind the <a href=\"https:\/\/stockviz.biz\/index.php\/2021\/09\/10\/ranking-and-visualizing-model-performance-metrics\/\" target=\"_blank\" rel=\"noreferrer noopener\">Radar Plot<\/a> above is that the larger the area under the points, better the strategy. Model Momentum is in pink and it pales in comparison to most of its constituents. Surprisingly, the <a href=\"https:\/\/stockviz.biz\/theme-eq\/9EABD2F0-392A-4D89-A665-EF6576A7D471\" target=\"_blank\" rel=\"noreferrer noopener\">Financial Strength Value Theme<\/a> (light green,) that is rebalanced annually, beat out everything else.<\/p>\n\n\n\n<p>What explains the underperformance?<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Not being able to go into cash\/bonds meant a larger hill to climb during recoveries. However, cash is a double-edged sword. If you get the timing wrong, you might end up going into cash <em>after<\/em> the bottom and watch the market recover helplessly. Unless the trend formation period is really short, cash is not a viable option.<\/li><li>High transaction costs can also be playing a role here. The difference between <a href=\"https:\/\/stockviz.biz\/index.php\/2021\/08\/22\/gross-vs-net-returns\/\" target=\"_blank\" rel=\"noreferrer noopener\">Gross and Net<\/a> returns is ~15%. Not as high as a pure momentum strategy but not trivial either. Also, US portfolios do not incur STT and brokerages are essentially zero.<\/li><li>Maybe 20-months is too short a window to judge such a slow-moving strategy. The research looks solid and maybe all we need is to give it some time?<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Factor performance tends to be sticky. If Value, Momentum, Quality, etc. out-performed in the recent past, they continue to out-perform in the near-future. AQR wrote a paper on it back in January 2019: Factor Momentum Everywhere. More recently, the folks at Research Affiliates extended the research in their Factor Momentum paper. Based on AQR&#8217;s research, &hellip; <\/p>\n","protected":false},"author":2,"featured_media":40882053,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[3491,2761],"class_list":["post-40882023","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-momentum","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40882023","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=40882023"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40882023\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/40882053"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=40882023"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=40882023"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=40882023"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}