Factor Performance During Recent Volatility

Feb 12, 2018

Factor Performance During Recent Volatility

Global stock markets have taken a nearly universal beating over the past week and a half. But as Anil Rao illustrates in his article titled “Understanding Factor Exposures When Markets Become Volatile”, not all investors were feeling the pinch. The market began its slide on Friday, February 2nd and continued through the course of the following week. It was on Monday, February 5th that the tendencies of a market rotation could be observed.

MSCI, the company for which Rao writes, uses multiple factor indexes to identify market trends. One of the indexes studied, the USA Momentum Intra-Day Active Return index, tracks momentum stocks with characteristics including higher volatility and higher betas. Another index tracked by the firm is the USA Min Vol Intra-Day Active Return which follows the performance of low volatility, low beta equities. When comparing the performance of each index to overall market performance, an interesting pattern forms.

While the performance of the momentum index suffered losses, mirroring the overall market, the minimum volatility index seems to buck the trend. Comprised of equities that possess lower betas, not only did this index outperform the general equities market, but actually made gains during market sell-offs. As volatility began to seep into the market, capital was pulled out of volatile investments and repositioned into less volatile equities. Investors whose portfolios included a blend of stocks that maintained an overall lower beta likely experienced less severe losses as the market dipped. While climbing markets can result in higher gains, unintended over exposure to high beta equities can exacerbate losses as markets tumble.

To read the complete MSCI article please click here