This post updates the quant strategies performance through year end 2020. The 2019 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 where I have links to posts describing many of the quant strategies in more detail. 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.
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, then check the portfolio rules ever month to verify if any stocks violate the sell rules. If so, you replace the sold stocks with new holdings. Performance for portfolios with only 10 holdings are better than results shown in the tables below. The historical results for the various strategies I track are below.
As the table shows, 2020 was a tough one for the buy and hold versions of the quant strategies. On average the strategies did pretty well, especially the Core 4, but this was all due to the great performance of the momentum strategy. All the strategies, except momentum, underperformed the SP500. The top strategies were the consumer staples, Greenblatt value, and momentum strategies. Over the last 5 years, the quant strategies have underperformed (except momentum) as well, driven mainly by factor underperformance; small caps, value, and equal weight indices have all underperformed the large cap SP500. Only momentum has outperformed. Take a look at thee spread between value and momentum over the last 5 years, and even since 2012. Momentum has outperformed value by 9% compounded over the last 5 years. But still, over longer time periods, even since the financial crisis in 2008, the quant strategies still offer better performance than the broad market and even the various factors (value, momentum, etc). The real question is, has something fundamentally changed in markets over the last 5 years, or are markets due for some massive mean reversion? I’d bet on the latter vs the former but who knows…
The next table shows the performance of the same quant portfolios but using the SPY-COMP indicator to manage the significant market drawdowns that are par for the course for these type of quant strategies. The only difference is that the table below assumes the risk-off asset is cash, not intermediate government bonds. This is just a limitation of the backtesting tool. Returns would be higher otherwise. You can read about using the SPY-COMP indicator and the Economic Pulse Newsletter here,
As the table shows, similar story here to the buy and hold versions except in 2020 the performance was better across the strategies. Three strategies outperformed the SP500; momentum, microcap, and consumer staples. The same comments on factor underperformance made above apply here. However, with the SPY-COMP indicator the underperformance is less and only shows up over the last 5 years. Also here, overall, over longer periods of time, the quant strategies with SPY-COMP have held up very well. Even during the incredibly strong market for US stocks, 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. Finally, note that the max drawdowns for the strategies using the SPY-COMP indicator are much better than the buy and hold versions. This level of drawdowns is similar to a 60/40 stock bond portfolio whose performance I have also listed in the table above. Comparing the quant strategy returns to a 60/40 portfolio, at similar levels of drawdowns, quant stock strategies easily outperform.
As I discussed last year, the bigger question in my mind cones when comparing individual stock quant investing vs other styles of quantitative investing like TAA strategies that use ETFs, which are much easier to implement and manage. 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. I have listed the performance of the average TAA strategy over the same time periods in the table above. Quant strategies have done and continue to perform much better than TAA approaches.
Another question comes to mind. Are certain strategies just fundamentally better than others? Or is it possible to use relative momentum among the quant strategies to improve overall performance? The simple answer is yes to both. This is something I’ve been digging into recently and the results are promising. More on this in another post but if you want an introduction to the concept see this post from the team at AlphaArchitect. That will point you in the right direction.
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 strategies..
That’s about it. I’ll put these updated tables in the Portfolios section as well.