Factor Rotation Is Possible, But Is It Worth It?

December 30, 2016

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?”


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