2017 Factor Alpha Newsletter
“Value” vs. “Momentum”

Categories Investing, Momentum, OSAM Research, Value

The past year was full of plot twists. Momentum beating Value was not one of them. The victory comes as no surprise because these 2 themes swap leadership cyclically — 2017 was Momentum’s year. And, as you can see in the exhibits below, Momentum’s winning streak definitively spans all 7 of the universes we ran.

Following up on prior articles that presented Market Cap and Value-only in these same 7 universes, our core fundamental beliefs remain the same in 2018:1

  1. Factors drive returns.
  2. What you don’t own matters.
  3. Discipline wins.
  4. Risk matters.
  5. Continuous research improves results.

We’ve built & tested 6 proprietary themes. For selecting stocks: Value, Momentum, and Yield. For avoiding stocks: Earnings Quality, Earnings Growth, and Financial Strength. None of these are used in isolation in our strategies’ portfolio selection methodology.2 Instead, we help investors build conviction-weighted, high Active Share portfolios by using various hybrids of several multi-factor themes.

Bearing in mind all of that, this Factor Alpha Newsletter3 is potentially misleading because we don’t build portfolios using only 2 themes.4

Within these 7 universes below, we pair the strongest decile (10%) of stocks selected by Momentum5 and the cheapest decile of our Value theme6 and then find the Factor Alpha of each one versus “every stock in that universe”.7

Cumulative Excess Returns vs. Entire Universe:

Momentum (thick line) “Strongest Decile in Each Universe” 
Value (thin line) “Cheapest Decile in Each Universe”

(Jan. 1 thru Dec. 31, 2017)

OSAM’s “Micro Cap” Universe8

OSAM’s “Small Cap” Universe9

OSAM’s “All Cap” Universe10

OSAM’s “Large Cap” Universe11

OSAM’s “Global Large Cap” Universe12

OSAM’s “International” Universe13

OSAM’s “Canadian” Universe14

The OSAM Blog will have a plentiful 2018, with plenty of new content on offer… subscribe and you’ll get an email alert next time we post an article.

  1. For a more complete description of these 5  tenets, see Factor Alpha Newsletter 11/15/17.
  2. That’s because, in any given year, one factor or theme may do well or poorly, creating noise in the long-term process.
  3. In this format, we follow the live-time performance of 2 multi-factor themes versus the benchmark — across various stock selection universes. Usually the format is flipped (a theme-by-theme view of a single Universe).
  4. This format was introduced with Market Cap 3Q17.
  5. Our multi-factor Momentum theme selects stocks with impressive and stable recent total returns.
  6. Our multi-factor Value theme selects stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.
  7. For this survey, the vertical scale is constrained so that it’s easier to compare one chart to the next.
  8. We define Micro Cap as stocks with a market cap between $50M and $200M. The total market cap of the microcap space is $146B, which is about the same size as The Walt Disney Company. This means that microcaps are a scarce opportunity, which is good because larger institutional asset managers often neglect them. The typical microcap stock is only covered by 2.1 analysts on average, and many have no analyst coverage at all.
  9. We refer to Small Cap stocks as the universe including all stocks trading on the NYSE, AMEX, and NASDAQ with an historical inflation-adjusted market capitalization between $200 and $2B.
  10. Stocks included in the Compustat Database listed on a U.S. exchange with a market value greater than $200M and a price-per-share greater than $1. The stocks are equal-weighted.
  11. Large stocks consisting of stocks traded on U.S. exchanges with an inflation-adjusted market cap greater than average.
  12. Large global stocks consists of stocks with an inflation-adjusted market cap greater than average.
  13. Stocks have headquarters and are domiciled outside of the U.S. and Canada.
  14. Stocks domiciled in Canada.