It was the year when all the world’s top investing strategies fizzled. Take heart in that.
Share owners who want to curse their bad choices in 2018 can derive at least a shred of comfort from realizing how widespread the misery was. Not only did every major market around the globe disappoint, but so did all the best researched ways of picking stocks.
Value investors and momentum players both took a whipping. People who look for steady, stable stocks suffered, as did those who prefer to buy thinly traded shares. All these investing approaches – factors, in the jargon – have produced impressive results in the past. But not over the past year. It’s something to keep in mind as you open the year-end statements from your broker.
“Most factor-focused investors are likely keen to forget 2018 given the negative performance,” observed Nicholas Rabener, managing director of FactorResearch, a market analysis firm in London. It was, he acknowledged in a New Year’s research note, an “unusual” 12 months.
The generally miserable performance of all the major factors last year could create the foundation for a better 2019. But that is far from certain. Mr. Rabener notes that none of the factors he follows are extremely cheap based on fundamental valuations.
This creates a challenging environment for several fund companies that have introduced factor-based products in recent years. These products attempt to pick stocks with attributes that have produced strong results in the past.
Researchers debate which factors matter the most, but generally agree on a handful of top contenders. For instance, there is the value factor, which essentially consists of looking for stocks trading at low prices compared with their earnings and book value. Although this approach has endured a rough few years, it has performed well over several decades.
The momentum factor has also been a long-term winner. The idea here is that you can generate superior returns by buying stocks that have shot upward in recent months, so long as you make a practice of dumping them as soon as their momentum wanes.
In addition, low volatility strategies that favour stable, steady stocks have done well over the years. So have liquidity approaches that select stocks that don’t trade that often.
Several money managers now offer exchange-traded funds (ETF) that allow investors to bet on each of these factors in isolation. But in 2018, none of these well-researched, carefully calibrated factors managed to deliver for investors.
For instance, Vanguard Canada’s Global Value Factor ETF lost 8.94 per cent, when both share price changes and dividends are included. Only slightly better was the company’s Global Momentum Factor ETF, which lost 5.19 per cent. Meanwhile, the Global Liquidity Factor ETF surrendered 2.98 per cent, while the Global Minimum Volatility ETF managed to back into top place, by dint of losing only 2.06 per cent over the year.
Similarly, investors in the currency-hedged version of the First Asset Morningstar International Momentum Index ETF lost 16.99 per cent, while those in the First Asset Morningstar International Value Index ETF lost 15.79 per cent.
So is this the end for factor investing? Nearly certainly not. Those who like this approach respect the way it bases investment decisions on deep, quantitative research, searching for attributes that have led to superior performance in the past. All of that is still valid. But anyone who wants to jump in now should be prepared to be patient. If the past year has demonstrated anything, it is the capacity for a slowing global economy to derail even the best thought-out strategies.
Ian McGugan