Understanding the Industry-Momentum Factor
Blog post
August 19, 2020
- The industry-momentum factor reflects the tendency of stocks in "winning" industries to continue to perform well and how those from "losing" industries tend to continue to underperform, as investors may initially underreact to market news.
- As global equity markets responded to the COVID-19 pandemic, the factor showed positive performance.
- We found that a relatively small number of sub-industries that were significantly impacted drove performance during this period.
Factor Performance over the COVID-19 Period
The exhibit below shows the performance of the industry-momentum factor from January 1995 to August 2020 and for different regional-equity models. Over the long term, this factor has typically produced positive returns with low volatility.
Performance of the Industry-Momentum Factor in Different Regional Models
More recently, as the COVID-19 pandemic affected financial markets, there was significant improvement in the factor's performance. Looking at the first half of 2020 through the MSCI Global Total Market Equity Trading Model, we saw that most of the return occurred between Feb. 21 and April 3 (shaded in exhibit below).
Year-to-Date Performance of Industry-Momentum Factor in Global Trading Model
Sub-Industry Drivers of Performance
To understand the drivers of performance, we analyzed sub-industry contributors to the industry-momentum factor's return. A sub-industry would be a positive contributor to the factor's return if it continued to follow the same performance trend as in recent history. The chart below shows the factor's total performance, as well as contributions from the top and bottom 10 sub-industries, from Feb. 21 to April 3. Positive performance contributions were concentrated in 20 (out of 158) sub-industries (other regional models showed a similar concentration).
Total Contribution from Top/Bottom 10 GICS Sub-Industries
Data from Feb. 21 to April 3, 2020. Source: MSCI Barra Global Equity Trading Model
Which sub-industries drove performance? The table below lists the top 10 positive and negative contributors to the factor's return in GEMTR. For illustration, we also include the average start-of-period exposures to the industry-momentum factor for each sub-industry in the model's estimation universe.
Top/Bottom GICS Sub-Industry Contributors to Return
('Unnamed: 0_level_0', 'Contribution (%)') | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') | ('Contribution (%)', 'Unnamed: 2_level_1') | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') |
|---|---|---|---|---|
('Unnamed: 0_level_0', 'Contribution (%)') Top 10 Positive GICS Sub-Industry Contributors | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Top 10 Positive GICS Sub-Industry Contributors | ('Contribution (%)', 'Unnamed: 2_level_1') None | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') None |
('Unnamed: 0_level_0', 'Contribution (%)') 1 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Hotels, Resorts & Cruise Lines | ('Contribution (%)', 'Unnamed: 2_level_1') +0.9% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -1.6 |
('Unnamed: 0_level_0', 'Contribution (%)') 2 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Retail REITs | ('Contribution (%)', 'Unnamed: 2_level_1') +0.7% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -1.9 |
('Unnamed: 0_level_0', 'Contribution (%)') 3 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Human Resource & Employment Services | ('Contribution (%)', 'Unnamed: 2_level_1') +0.6% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -2.0 |
('Unnamed: 0_level_0', 'Contribution (%)') 4 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Hotel & Resort REITs | ('Contribution (%)', 'Unnamed: 2_level_1') +0.5% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -2.3 |
('Unnamed: 0_level_0', 'Contribution (%)') 5 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Asset Management & Custody Banks | ('Contribution (%)', 'Unnamed: 2_level_1') +0.4% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') 0.9 |
('Unnamed: 0_level_0', 'Contribution (%)') 6 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Apparel Accessories & Luxury Goods | ('Contribution (%)', 'Unnamed: 2_level_1') +0.4% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -1.1 |
('Unnamed: 0_level_0', 'Contribution (%)') 7 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Industrial Machinery | ('Contribution (%)', 'Unnamed: 2_level_1') +0.4% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') 0.0 |
('Unnamed: 0_level_0', 'Contribution (%)') 8 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Oil & Gas Refining & Marketing | ('Contribution (%)', 'Unnamed: 2_level_1') +0.3% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -0.7 |
('Unnamed: 0_level_0', 'Contribution (%)') 9 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Industrial Conglomerates | ('Contribution (%)', 'Unnamed: 2_level_1') +0.3% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -0.9 |
('Unnamed: 0_level_0', 'Contribution (%)') 10 | ('Unnamed: 1_level_0', 'Factor Exposure (Standard Deviation)') Life & Health Insurance | ('Contribution (%)', 'Unnamed: 2_level_1') +0.3% | ('Unnamed: 3_level_0', 'Unnamed: 3_level_1') None | ('Factor Exposure (Standard Deviation)', 'Unnamed: 4_level_1') -0.5 |
Top 10 Negative GICS Sub-Industry Contributors | Top 10 Negative GICS Sub-Industry Contributors | None | None | None |
1 | Homebuilding | -0.5% | None | 2.8 |
2 | Electrical Components & Equipment | -0.5% | None | 1.3 |
3 | Internet & Direct Marketing Retail | -0.4% | None | 1.5 |
4 | Specialized REITs | -0.3% | None | 2.1 |
5 | Research & Consulting Services | -0.3% | None | 1.9 |
6 | Education Services | -0.3% | None | 2.0 |
7 | Financial Exchanges & Data | -0.3% | None | 0.6 |
8 | Environmental & Facilities Services | -0.3% | None | 1.2 |
9 | Property & Casualty Insurance | -0.3% | None | 0.6 |
10 | Oil & Gas Storage & Transportation | -0.3% | None | 0.6 |
Data from Feb. 21 to April 3, 2020. Source: MSCI Barra Global Equity Trading Model
Positive contributions came mostly from the sub-industries that were negatively affected by COVID-19. The exponential weighting scheme used in the factor's construction drove the factor to underweight many of the sub-industries already underperforming the broader market when the sell-off took place. When these sub-industries declined even faster, the factor's outperformance accelerated further.
The factor's negative exposure to various sub-industries helped buoy its performance. For example, tourism-related sub-industries were among the first wave to be negatively impacted by the unfolding crisis: Travel restrictions adopted by many countries in an attempt to quell the spread of the virus resulted in hotels, resorts & cruise lines dropping 12% in the first six weeks of the year. During the next six weeks, as the coronavirus took a firmer grip on equity markets, this sub-industry declined a further 60%. Similarly, this wave also affected the hotel & resort REITs sub-industry, as investors anticipated further losses for tourism-related REITs.
The retail sector also suffered early in the COVID-19 crisis, as consumers avoided shopping in public places (except for essentials like groceries and health-care products), causing many brick-and-mortar stores to close. Examples of distressed retail sub-industries were apparel, accessories & luxury goods and the retail-REIT sub-industries (down 27% and 50%, respectively, over the six weeks of the crisis).
Regional models show similar contributors to performance from these sub-industries.
Conclusion
Why did the industry-momentum factor produce positive performance during the market's initial COVID-19 decline? Our analysis shows it was driven by a concentration of already-underperforming sub-industries as they entered the pandemic, when they declined further. This analysis assists the understanding of the industry-momentum factor's performance both through its construction and the market dynamics.
Further Reading
1MSCI’s Systematic Equity Strategies refer to the systematic implementation of fundamental or technical investment anomalies or strategies. They are a subset of style factors.2See, for example:
Moskowitz, T. J. and Grinblatt, M. 1999. “Do Industries Explain Momentum?”.
Giannikos, C. and Ji, X. 2007. "Industry Momentum at the End of the 20th Century." .3GICS is the global industry classification standard jointly developed by MSCI and Standard & Poor’s.4A one-month half-life is typically applied to give higher weight to the more recent performance period.
Moskowitz, T. J. and Grinblatt, M. 1999. “Do Industries Explain Momentum?”.
Giannikos, C. and Ji, X. 2007. "Industry Momentum at the End of the 20th Century." .3GICS is the global industry classification standard jointly developed by MSCI and Standard & Poor’s.4A one-month half-life is typically applied to give higher weight to the more recent performance period.
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