Catherine Yoshimoto
The past five years in US markets have been nothing if not eventful. They’ve featured every macro regime of the economic cycle, where markets weathered a global pandemic, quantitative tightening and easing, inflation, and both low and rising rate environments. And while US large cap equity indexes have generally fared well over the past five years, the Russell 1000 Invesco Dynamic Multifactor Index has posted standout returns — shedding light on the potential value of tactically allocating to factors throughout economic cycles.
US large caps did well — but factor tilting gave them a boost
The Russell 1000 Index — an unbiased barometer for the broad US large cap segment — has largely shrugged off the ever-shifting macroeconomic backdrop since 2017, returning an annualized 9.7% for the period.[1] However, while this performance is far from weak, the Russell 1000 Invesco Dynamic Multifactor Index returns have almost consistently outstripped those of the Russell 1000 over the past five years, outperforming by a cumulative +4,958 bps.
Dynamic factor tilting boosted US large cap performance-Cumulative Return Difference
Source: FTSE Russell as of February 28, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Growth was the right choice at the right time
One of the noteworthy US market trends over the past five years was growth stocks’ outperformance relative to value from 2019-2021. The Russell 1000 Growth Index represents the constituents of the Russell 1000 that exhibit growth characteristics — effectively measuring the performance of the US large cap growth segment — and the index returned an annualized 11.6% for the five-year period.
Growth’s run of strong relative performance is evident when comparing the Russell 1000 Growth index to the Russell 1000 Invesco Dynamic Multifactor Index. However, despite a stretch of underperformance during the growth rotation, the dynamic multifactor index cumulatively outperformed by +2,713 bps over the past five years.
This chart suggests that while a tactical rotation into growth stocks for the 2019-2021 period would have delivered strong relative performance, allocating dynamically to factors would have resulted in higher relative returns over the longer term.
Why the factor tilt outperformance?
Understanding how factors behave in different market cycles is key to explaining Russell 1000 Invesco Dynamic Multifactor Index outperformance. The past five years have featured every macro regime in the economic cycle — and, as we have explaine before, factors tend to exhibit cyclicality and perform differently in response to each regime.
Factors exhibit cyclicality
Source: Invesco Investment Solutions. For illustrative purposes only
As a result of this cyclicality, no one factor consistently outperforms over every short-term period. A factor that finishes at the top of factor rankings one year might not continue that trend into the next calendar year.
Factors behavior: Cyclical returns
| Hypothetical calendar year returns (%) 2007-2022 | Dispersion (best factor - worst factor) | ||||||
|---|---|---|---|---|---|---|---|
| 2007 | Quality 11.56 |
Momentum 9.13 |
Market 5.77 |
Value 3.92 |
Low vol 3.70 |
Size 3.48 |
+8.08 |
| 2008 | Low vol -31.10 |
Quality -31.14 |
Momentum -36.66 |
Value -36.74 |
Size -37.57 |
Market -37.6 |
+6.50 |
| 2009 | Size 41.73 |
Market 28.43 |
Quality 26.72 |
Value 24.90 |
Momentum 22.44 |
Low vol 17.85 |
+23.89 |
| 2010 | Size 27.76 |
Value 20.13 |
Momentum 17.07 |
Market 16.1 |
Quality 14.55 |
Low vol 11.83 |
+15.93 |
| 2011 | Low vol 8.46 |
Quality 8.46 |
Momentum 2.28 |
Value 1.8 |
Market 1.50 |
Size -1.17 |
+9.63 |
| 2012 | Size 19.18 |
Value 18.82 |
Market 16.42 |
Quality 15.87 |
Momentum 15.23 |
Low vol 13.04 |
+5.93 |
| 2013 | Size 36.60 |
Value 36.38 |
Momentum 33.58 |
Market 33.11 |
Quality 31.66 |
Low vol 29.61 |
+6.99 |
| 2014 | Low vol 15.85 |
Market 13.33 |
Quality 13.24 |
Value 12.88 |
Momentum 12.65 |
Size 11.32 |
+4.53 |
| 2015 | Low vol 3.06 |
Momentum 2.69 |
Quality 2.11 |
Market 0.92 |
Size -2.26 |
Value -3.34 |
+6.40 |
| 2016 | Value 18.66 |
Size 15.99 |
Market 12.05 |
Low vol 11.56 |
Quality 10.71 |
Momentum 7.94 |
+10.72 |
| 2017 | Quality 28.07 |
Momentum 22.83 |
Market 21.69 |
Low vol 20.0 |
Value 19.74 |
Size 18.25 |
+9.82 |
| 2018 | Low vol -2.43 |
Quality -2.68 |
Momentum -4.39 |
Market -4.78 |
Value -8.09 |
Size -8.84 |
+5.90 |
| 2019 | Quality 32.19 |
Low vol 32.16 |
Market 31.43 |
Momentum 30.92 |
Value 29.78 |
Size 29.03 |
+3.17 |
| 2020 | Quality 26.32 |
Momentum 24.65 |
Market 20.96 |
Size 16.39 |
Low vol 13.65 |
Value 7.06 |
+19.26 |
| 2021 | Value 31.73 |
Quality 30.21 |
Low vol 26.86 |
Market 26.45 |
Momentum 25.20 |
Size 22.80 |
+8.93 |
| 2022 | Value 8.70 |
Low vol -16.20 |
Size -18.0 |
Momentum -18.20 |
Market -19.10 |
Quality -21.40% |
+12.70 |
Source: FTSE Russell, as of 12/31/2022. Data presented is provided for illustrative purposes and includes hypothetical performance. All Russell 1000 single factor indexes (size, value, momentum, low volatility, quality and yield) were incepted on 9/28/2015. The Russell 1000 Index (Market) was incepted 1/1/1984. All inforamtions presented prior to the inception dates is back-tested. Although back-tested data may be prepared with benefit of hindsight, these calculations are based on the same methodologythat was in effect when the index was officially launched. Index returns do not reflect payment of any sales charges or fees. An investment cannot be made in a index. Performance, whether actual or back-tested, does not guarantee future results.
An index designed to dynamically capture factor cyclicality
As we outlined recently Some investment strategies don’t survive contact with reality, but the Russell 1000 Invesco Dynamic Multifactor Index has performed true to its design over the past five years. Constructed with a transparent, rules-based approach that dynamically re-weights constituents based on factor scores and economic cycles, the index’s multi-factor tilting framework has been a key driver behind its strong performance.
For more details about multi-factor indexes, see our FTSE Invesco Dynamic MultiFactor Index Series.
For more information on equity factors, see our equity factors report that’s updated quarterly.
Disclaimer
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