Factor Index Performance in Changing Economic Environments

Blog post
Dimitris Melas
April 11, 2014
Institutional investors have historically been concerned over the changing state of the economy and its impact on their investments whether it was about "Abenomics" or "taper tantrums." As a result, we are noting that they are increasingly taking changing macroeconomic conditions into consideration for their asset allocations. So, we recently looked through the lens of factor-based investing and sought to provide a historical framework for the process. We employed more than 40 years of MSCI factor index data, as well as MSCI Macroeconomic and MSCI Asset Pricing models to identify plausible economic growth and inflation regimes—and their transitions—and show how different factor indexes have historically performed. This analysis provides valuable insight for institutional investors employing factor investments strategically or tactically in their asset allocation decisions. What we found includes:
  • In factor indexes, Equal Weighted and Value Weighted have been the most cyclical, and Minimum Volatility and Quality the most defensive.
  • The MSCI Momentum, Value Weighted and Equal Weighted Factor Indexes exhibited the highest active returns following a large positive shock to trend growth in Developed Market (DM) economies.
  • In addition, Minimum Volatility, High Dividend Yield and Quality outperformed following a large negative shock.
Finally, when growth has remained positive or strengthened, then the Equal Weighted Factor Index has historically outperformed and Minimum Volatility underperformed. On the other hand, in an environment of slowing growth, an investment in Quality has generally outperformed, and when coupled with low inflation then Minimum Volatility has outperformed. To read the full paper, please click here.
Dimitris Melas
Dimitris Melas
Managing Director, MSCI Research

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