Sector Exposure and Factor Returns After the 2016 US Election

Summary

The document raises a factor-investing question about the divergence in equity factor performance around the final quarter of 2016. It reports that low volatility had recently outperformed broad capitalization-weighted indices before weakening after the US presidential election, while value had begun to recover earlier in the year. The central issue is whether these movements reflect factor effects or changing expectations for industry sectors.

It proposes sector-neutral factor portfolios as a possible way to reduce sector-driven performance differences. The note points readers to MSCI factor-index and broad-market fact sheets as a way to examine the stated performance pattern, but it does not provide the charts, return figures, or an empirical attribution separating sector effects from factor returns. The proposed explanation and portfolio adjustment are therefore hypotheses to investigate rather than demonstrated findings.

Key ideas

• The document reports low volatility weakness and a value recovery around late 2016.
• It asks whether sector outlook changes explain the observed factor performance spread.
• Sector-neutral factor tilts are suggested as a possible response to sector-driven effects.
• The note cites index fact sheets but does not provide an attribution analysis or supporting figures.

Tags

# Underperformance of low vol factor after US presidential election, comeback of Value


# Underperformance of low vol factor after US presidential election, comeback of Value












My question is about factor investing. In most equity markets (Europe, US) the factors momentum and low volatility have outperformed the cap weighted indices in the last couple of years while the value factor - which in my perception was still "fashionable" as investment style ("we are value-investors...") - underperformed significantly.

The last quarter of 2016 brought a change. After the US presidential election the low vol factor underperformed significantly while value continued its comeback which had already started sooner in 2016.

My question: Is this performance spread really due to the "factors" or rather due to the changing outlooks for industry sectors? If the latter were true then a portfolio with factors tilts but approximately sector neutrality could be a remedy to this development.

The performance claims above for 2016 can be checked on the MSCI webpage where factsheets for their indices are available showing the performance of the factor indices as well as the cap weighted ones per year. I did not post the performance charts from there as this could be forbidden by MSCI.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.