Again, nothing to scoff at, but we should also look at the ride we must take for it.
Data Source: Kenneth French Data Library. Calculations by Newfound Research. Past performance is not a guarantee of future returns.
The long-term positive trend contains significant periods of underperformance and prolonged drawdowns. For example, after terrific relative performance from 1/1972 to 11/1980, the factor rotation strategy goes through a five-year drawdown.
From 1/1994 to 11/1999, the strategy was again underwater. After finally making rapid new relative highs, the approach peaked in 2/2000 and cratered during the dot-com bust. In fact, from 2/2000 to 1/2001, the rotation strategy underperformed the passive strategy by 15 percentage points, and failed to breach its relative highs again until 1/2009.
Mind you, none of this analysis takes fees into account, which would make these drawdowns both longer and deeper.
So yes, we believe factor rotation is a possible and valid strategy. The question we must ask ourselves is: “Is the post-fee potential high enough to justify the short-term headache?”