As volatility returned to global markets in 2018, return patterns for equity styles were very unstable. With more signs of turbulence ahead, investors should prepare to reduce the impact of short-term factor swings on portfolio performance.

Investors in global stocks are facing tough conditions. In 2018, the MSCI World Index fell by 8.7%, in US-dollar terms. The index rose or fell by more than 1% on 45 days during the year, compared with only three days in an unusually calm 2017. The performance of stocks with types of characteristics known as factors, or styles—such as value, growth and momentum—was particularly unruly.

Equity Factor Returns Shifted Sharply in 2018

On a monthly basis, the best and worst performing equity styles shifted dramatically as the year unfolded (Display). Based on our analysis of six different global equity factors, momentum stocks were the best performers in four separate months, but were also the worst performers during four other months. Value stocks were the poorest performers in three months. Growth stocks did relatively well in January and May, but ranked near the bottom of the list over the last four months of 2018.

October was a particularly turbulent month. The collapse of growth stocks relative to the broader MSCI ACWI index in October ranked in the worst percentile of monthly returns recorded since 2003. In contrast, during the same month, value stocks’ relative returns were close to the best percentile of their history. During 2018, each factor index posted at least one month of relative returns in the top and bottom deciles of its performance record over the last 15 years.

Just how volatile was this compared with history? To check, we modelled a “panic portfolio” to buy the types of stocks that were sold down the most each month. It took the worst-performing style of stocks from the previous month based on MSCI ACWI style indices and rebalanced each month. In other words, this approach assumed that buying into an underperforming style segment would deliver results the next month—and would perform well if styles swung sharply. In 2018, this strategy would have outperformed the MSCI ACWI Index by 7.2%—the strongest relative performance in the 15-year period that we surveyed (Display).