Factor Spotlight
Factor University

Quality, Momentum, & Size

Last week we highlighted Profitability (Quality) as a factor that was reaching an inflection point in both the US and Global markets. I wanted to provide a quick update there, as well as for the Momentum and Size factors that we've been tracking over the past couple of months.

Profitability (Global Market)

  • Last week, this factor was +1.63% in the past 12 months on a cumulative basis. Today that return now sits at +1.64%.
  • On a normalized basis, return has fallen from +1.17 standard deviations above the mean last week to +0.78 today.
  • As a reminder, in our platform, Quality = Profitability, and is defined as a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Profitability (US Market)

  • Perhaps even more interestingly, normalized return for Quality in the US market appears to have crested at +2.61 standard deviations above the mean on 4/30/18, and today's +2.48 SD above the mean might indicate that the factor is now in the process of normalizing.
  • On a cumulative basis, we can see that YTD return peaked at 1.68% on 4/26/18 and is now sitting at 1.54%.

Medium-Term Momentum (Global)

  • Normalized return for Medium-Term Momentum has seen a sharp correction from +1.97 SD above the mean on 3/6/18 to -1.56 SD below the mean.
  • The previous trough on a normalized basis was -2.22 SD below the mean on 1/2/18.

Size (Global)

  • Lastly, Size factor has seen a swift bounce back from a normalized nadir of -2.66 SD below the mean on 3/6/18, to +0.77 SD above the mean today and climbing.

We'll continue to monitor the Profitability factor in both the US and global markets, as the reversion trend in both markets appears poised to continue.

Please let me know if you'd like to see the impact of any of these factors on your portfolio's performance and risk profile.


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