While the previously mentioned low volatility factor has beaten the market by 22.6% since 2008, momentum and quality styles also stand out as outperformers.
Momentum: recent winners surge ahead
Throughout 2017 and during the first quarter (Q1) of 2018, the momentum strategy (yellow line) has been the star of the show, outperforming the market by over 14%. This strategy essentially invests in stocks that have recently gone up in value, with the view that this trend will continue into the future.
Money poured into FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) throughout 2017. The recently named ‘WNSSS’ stocks (Weibo, Nvidia, ServiceNow, Shopify and Square Inc) have also seen spectacular share price gains of late, and are tipped to be the next tech sector winners. But for how long these companies can grow, let alone support, current lofty valuations is the multi—billion dollar question.
Quality: will predictable earnings steams and less geared balance sheets be the winning combination?
When things get shaky in financial markets, companies that exhibit a combination of high returns on equity (ROE), low debt—to—equity ratios and stable earnings per share (EPS) are thought to be better positioned to outperform the broader market.
The rise in equity volatility earlier this year has taken the sheen off the bull market somewhat. At the time of writing, the MSCI World Index is broadly flat year—to—date with the Volatility Index (VIX), remaining above levels last seen back in August 2016. However, as Table 1 above shows, quality stocks outperformed in Q1 and have done in all but two of the previous ten years.
The chart below (inspired by BlackRock) plots the VIX, along with the relative return of the MSCI USA Quality against the MSCI USA Index. It illustrates how the majority of the outperformance of quality stocks has been generated when volatility has risen sharply.
Chart 2: Do quality stocks outperform when volatility increases?