April 2017 Factor Review

April started out on a bearish note, but after various geopolitical risks subsided, the month ended with market indices skyrocketing. The Nasdaq made record highs with help from Microsoft, Google, Amazon and Facebook. Crude oil returns were the inverse of the market, rising into the middle of the month on geopolitics and hopes of OPEC cuts, but falling afterwards.

FACTOR RETURNS

April was a bad month for the Estimate Dispersion, Book/Price, and Short Interest factors. When every boat is rising, it apparently doesn’t matter if there is analyst uncertainty or value. And those shorting high short interest names are going to get squeezed. Solvency (ex-financials), Low Volatility, and ROE all performed well in April. Some of this factor movement can be attributed to sector bias, as both energy and financial stocks underperformed this month.

In an earlier blog post, we discussed using a cross sectional approach to factor analysis that lets us break down the factor exposure of equities more precisely. We thought we’d show some of the same factors, calculated using the two different methods, side by side. Below are charts for Beta, ROE and Size factors. The blue line is the time series representing the quintile approach, the orange line indicates the performance of the factor as measured by the cross-sectional approach.

As we can see, the absolute performance of these factors may differ, but remain highly correlated with each other. The quintile methodology is a lot more intuitive than the cross-sectional methodology, so we will continue to report quintile based factor returns. If you're a subscriber that is interested in the raw data behind the cross-sectional factor returns, please reach out to us.

Regards,
Omer