However you slice the market, the strategies that have been winning mostly rely on a few big names
Cris Sholto Heaton Investment columnist
Investment strategy
Factor investing is one of the most interesting ways to look at what’s going on in stockmarkets and what kind of environment we are in. While groups of stocks with certain characteristics have tended to beat the wider market over the long term, there are frequent ups and downs that can tell us a great deal. Take the size factor: small stocks have outperformed large caps over time, but there have been long periods when they lagged – and the last few years have been one of them, as we discussed recently (see issue 1998).
We can similarly look at value versus growth (cheap stocks have beaten faster-growing ones over time, but with frequent reversals); high-quality versus low quality (quality is typically defined as high return on equity, stable earnings and low debt); or other traits such as momentum – the tendency for stocks that have been going up over the past few months to keep going up.
Value still isn’t back
The chart shows a total return index for each of these three factors relative to the MSCI World index, starting in 1994. At each point, if the line is going up, the factor is outperforming the MSCI World. If it’s going down, it’s underperforming.
You can see that while value is often viewed as a reliable source of outperformance if your horizon is long enough, it has now cumulatively underperformed the overall index over the past 30 years. The past decade has been a tough time in which it has given back much of its relative outperformance. You can also clearly see past short spells when value did poorly (the dotcom bubble) and well (the years before the global financial crisis), and also note that the apparent value revival after the pandemic has faltered.
On the other hand, quality and momentum have outperformed but in very different ways. Quality has b
