In Figure 3, the graphs on the right-hand side display the accumulated wealth (i.e., cumulative total index returns) since the beginning of the 40-year period for the SciBeta Long-Term US Multi-beta Multi-strategy (MBMS) EW together with its cap-weighted reference index in the top panel, and the SciBeta Developed MBMS ERC and the SciBeta Broad Cap-Weighted Index in the bottom panel. On the left-hand side, the graphs show the corresponding wealth ratio, i.e., the ratio of the wealth level of the MBMS index over the wealth level in the cap-weighted reference. If the wealth ratio goes up, it means the MBMS index is over performing the cap-weighted index, and conversely, if it goes down, it is underperforming. We can see that over the 40-year U.S. track record, there was only one period where the MBMS EW index suffered relatively long underperformance—in the late 1990s. If one looks at the factor returns over this period, when there was the build-up of the technology bubble, the cap-weighted index performed quite well, as it was quite concentrated in technology stocks. Of course, over a short time period, it can happen that this concentration actually pays off relative to the factors used in the multi-beta allocation, as large, high-beta and growth stocks fared better during that period than small, low-risk or value stocks. Apart from that period when most of the factors did not pay off, the performance was quite steady over time. Similarly, one can link the periods of relative drawdown in the last 10 years in the developed universe to short time spans where the factors happened not to work. However, as the multi-beta allocations diversify the sources of return, such periods are rare and relatively short.
Bearing in mind that the rewarded factors yield positive premia in the long term in exchange for risks that can lead to considerable underperformance or relative drawdowns in shorter periods, it is important to analyse the robustness of the performance and its dependence on the market and economic conditions. One approach is to use the NBER definition of business cycles5 to break down the analysis into alternating sub-periods of "contraction" and "expansion" phases. Figure 4 shows annualised excess returns of the four multi-strategy factor indexes over the broad CW index throughout different economic cycles. The Mid Cap Multi-strategy Index has outperformed by a larger margin in expansion phases, while the Low Volatility Multi-strategy Index has a bias toward contraction phases. The difference across each multi-strategy factor index can be big, and presents opportunities for diversification across factors. The multi-beta allocations present less extreme variations throughout the different economic phases as they exploit the asynchronous movements of the different smart-factor indexes.