In our recent quarterly update (the recording of which is here), we noted that more factors than expected saw third-quarter returns that were larger than one would have expected given their volatility at the beginning of the quarter. Many of the regional factors that fell into that category were ones that are typically considered uncompensated sources of risk, such as Liquidity and Exchange Rate Sensitivity. However, Medium-Term Momentum fell into that category, with unusually positive returns during the quarter (and in fact year to date as well). Yesterday, October 10, the factor gave back some of that return, and again in many cases the return was larger than what would have been expected given the risk forecast on October 9. And as James Mackintosh noted in his Wall Street Journal article “Best Stocks Switch Places With the Worst”, value-oriented factors (in our case Earnings Yield and Value) did not pick up the slack. Adding in Dividend Yield, where higher-yielding stocks outpaced those paying low or no dividends would have helped erase much of the Momentum shortfall, though.
Low Volatility and Low Beta stocks fared quite well (in other words, the returns to Volatility and Market Sensitivity factors were negative), and in a number of regions returns were more than two standard deviations below what would have been expected given their expected risk. Another factor that stood out was Size; in most regions small-cap stocks were the winners, and large-cap stocks were the losers.
The table below highlights the one-day return to our factor-mimicking portfolios (a long-short portfolio with unit exposure to the factor in question and no exposure to any other factors, so the purest representation of the factor). The region with the highest return for the factor is highlighted in green, and the one with the lowest is highlighted in pink. An asterisk indicates that the factor return was outside a two-standard deviation range based on the risk forecast at the close of October 9.
We will undoubtedly report updates to these figures in the days ahead, but we knew our readers would want to see what happened to factors as soon as possible. Check our blog posts and Weekly Highlights for those updates. You can register to get the highlights emailed to you once a week here, and get notification about new blog posts here.