This article discusses factor investing and challenges commonly held beliefs that may not withstand scrutiny, such as ‘Value always outperforms Growth over the long-term’ or ‘Quality stocks outperform during a downturn’.
Different factors regularly outperform at different times, for example, research shows that Size, Value, and Defensive factors tended to perform worse during the COVID-19 crisis than during the Global Financial Crisis (GFC). Meanwhile, the Momentum factor performed poorly during the GFC, but performed well during the COVID-19 crisis.
Sticking too closely to one factor – even Value – can mean years of unnecessary underperformance. Valuation should be the prism that allows investors to assess which factors to invest in as market conditions change, maximising the potential for outperformance.