Swinging Factors Shake Core Performance

Core equity managers have struggled to deliver this year in a rapidly changing market environment. We think exposure to volatile equity factors—which is often unintended—may be the culprit.

Equity factors can be oh so fickle. Research shows that exposure to features of stocks known as factors—such as attractive valuations or strong momentum or profitability—can help portfolios outperform the market over time. But over short periods, factor performance can be very volatile.

This year’s patterns are a case in point. In the first half of 2016, global stocks considered to be safer, such as those with lower-volatility characteristics or higher dividend yields, outperformed the MSCI All Country World Index (ACWI) by a wide margin. But they underperformed sharply in the third quarter (Display, left chart). Stocks with high momentum also trailed the benchmark in the third quarter after a solid second quarter.