One of the more interesting things that happened in asset management in 2017 regarded factors. While the concept of factors associated with risk-adjusted outperformance has existed for decades, in 2017 investors saw the ability to allocate either to individual factors or to multifactor strategies enter the mainstream in a big way. Investors will likely continue to evaluate different factors in order to gain unique insights into where the equity market may go next.
2017: Momentum and Then Everything Else
If we array MSCI’s five USA factor indexes—what many view as the baseline starting point of factor discussions—we see that in 2017 the MSCI USA Momentum Index returned nearly 38%.1 The next-best index—the MSCI USA Sector Neutral Quality Index—returned only 22.5%.2 This is a massive gap. In fact, the four-factor indexes outside of momentum were all within a range of less than 4% of one another.
Value: In a Way, the Opposite of Momentum
Sometimes it is worth exploring strategies that aren’t really among the “worst” performers but are also far from the best. The WisdomTree U.S. High Dividend Index and the WisdomTree U.S. Dividend ex-Financials Index are two such strategies. While these were up 12.1% and 14.3%, respectively, in a year where the S&P 500 Index was up 21.8%, clearly there was little reason to draw much attention in this direction.3
However, it is notable that these strategies are right in line with the S&P 500 Value Index and Russell 1000 Value Index benchmarks. In a way, these strategies could be thought of as the opposite of momentum and growth—the avenues that generated some of the best outperformance in 2017.
“Value” Doesn’t Mean the Same Thing for All Indexes
Some might ask, why did the MSCI USA Enhanced Value Index outperform both the S&P 500 Value Index and the Russell 1000 Value Index in 2017? The answer: the MSCI USA Enhanced Value Index is tilted back toward being sector neutral to the MSCI USA Index,4 which will tend to mitigate the risk of, say, being very under-weight in the Information Technology sector during a year (like 2017) in which it delivered very strong performance. A typical value strategy would not make this adjustment.
