SPBC - Why U.S. Large Caps Have Fared Better With A Factor Tilting Approach
2023-03-29 03:30:00 ET
Summary
- While US large cap equity indexes have generally fared well over the past five years, the Russell 1000 Invesco Dynamic Multifactor Index [RB1] has posted standout returns.
- 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.
- 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.
By Catherine Yoshimoto, director, product management
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 [RB1] 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.
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 factors tend to exhibit cyclicality and perform differently in response to each regime.
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.
In essence, the Russell 1000 Invesco Dynamic Multifactor Index performance has not only benefited from low correlations among factors, but also from tactically weighting the factors themselves as the US economy has cycled through macro regimes.
An index designed to dynamically capture factor cyclicality
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.
[1] FTSE Russell for the period ending February 28, 2023.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Why U.S. Large Caps Have Fared Better With A Factor Tilting Approach