This post updates the quant strategies performance through year end 2019. The 2018 version of the post is here. If you’re new to all this quant stuff, and like what you see, you can start on my Portfolios page and read through the posts in the quant section. Then you can dive into more detail by reading the posts in the quant category on the blog. Better yet, buy What Works On Wall Street. And if you’re really into it consider subscribing to my QuantPulse service which does all the heavy lifting for you. Let’s jump right into it.
For QuantPulse subscribers, the performance numbers in the SP-UI section of this post are similar to the 25 stock versions of the strategies in QuantPulse.
First, let’s start with the buy and hold versions of these strategies. Basically, at the beginning of the year you run the screens, buy the top 25 stocks on the list and hold for 1 year. Then re-balance. The historical results for the various strategies I track are below. The last 4 years are broken out into the individual years. For this year I added the 2012 to 2019 time period. 2012 is when I started running these strategies for myself.
Note: all returns post 2009 are out of sample.
As the table shows, 2019 was a decent for the quant strategies but underperformed the SP500 by a lot on average. The top to strategies were the large SHY and momentum strategies. The VC2 strategy, a pure value strategy, really underperformed. Overall, the underperformance over the last 5 years is mainly driven by factor underperformance; small caps, value, and equal weight indices have all underperformed the large cap SP500. Only momentum has outperformed. But over longer time periods the strategies still offer much better performance than the broad market and even the various factors (value, momentum, etc).
The next table shows the performance of the same quant portfolios but using the SPY-UI indicator to manage the significant market drawdowns that are par for the course for these type of quant strategies. You can read about using the SPY-UI indicator in quant portfolios here. And you can read about by Economic Pulse Newsletter here, which uses a enhanced version of this indicator for better results.
Note: I introduced 4 strategies in 2019 that are not in the table because they were not available for the whole year. For 2019 performance for those strategies was: Low Vol : 22%, Greenblatt : 34%, Conservative Formula : 20%, Vol Curve Model (SPY/TLT): 34%.
As the table shows, similar story here except in 2019 the more frequent re-balancing of these portfolios (in order to check every month for the status of SPY-UI) caused underperformance over the annual versions. The same comments on factor underperformance made above apply here. Overall, over the last 5 years, the SPY-UI versions of these strategies have done significantly better than the buy and hold versions but still underperformed the SPY. The underperformance is about half as much as the buy and hold versions. Also, most of these strategies are value based and value has really underperformed for quite a long time, especially the last 5 years (see IWD vs SPY performance). Thus the strategies have done quite a bit of heavy lifting just to get the results they have.
Over longer periods of time the quant strategies have held up very well. Even during the current bull market, from 2009, the quant strategies have handily beaten the market and the various factor indices. During periods encompassing bull and bear markets, back to 1999 with my backtests and back to 1969 with O’Shaughnessy’s work, the results are even better.
The big question though is has something radically changed in markets over the last 5-8 years that would say that these strategies will not work as well in the future? Well, the best minds in the business don’t think so. There has been some great pieces written recently on the long drought in value and factor outperformance. This piece from Research Affiliates discusses the dry spell in value. This one from AQR discusses that maybe now is the time for a value comeback. And finally, this one from OSAM discusses decay in factor outperformance. They are all worth a read. My 2 cents is that I think the decay in factor performance is real and here to stay (markets are more efficient) but that you will still get outperformance over long periods of time – just not as much.
The bigger question in my mind cones when comparing individual stock quant investing vs other styles of quantitative investing like TAA portfolios, or Hedge Funds. The table below compares the quant strategies with some of the TAA strategy numbers from my last post, and to an index of hedge funds.
Note: this comparison above does not include any of my Economic Pulse TAA Strategies.
In this comparison the quant strategies come out very well. Of course, it’s not a 100% valid comparison as the approaches are designed for different objectives but I think it’s illustrative. Quant strategies have done and continue to perform better than TAA approaches or the much hyped hedge funds.
In summary, the quant portfolios have stood the test of time, have outperformed the SP500 in bull and bear markets, have outperformed a basket of representative factor ETFs, and have outperformed other active approaches like TAA and hedge funds.
That’s about it. I’ll put these updated tables in the Portfolios section as well.