FACTOR PERFORMANCE IN TIMES OF MARKET TURNMOIL:THE COVID-19 CRASH REVISITED

Abstract

We examine factor performance during the first quarter of 2020, a period in which markets were significantly impacted by the emergence of the Covid-19 pandemic. Certain factors like Value and Size underperformed notably, thereby raising questions by investors over the reward of risk factors and the usefulness of multi-factor solutions. We address these questions by examining whether factor performance in this period deviated from what the historical long-term track record of factor performance suggests.
We find that even though factors like Value, Size and Low Investment underperformed drastically, their performance is not unprecedented when considering long-term historical data. We also find that the performance of other factors such as Momentum, Low Volatility and High Profitability was positive and offset the negative performance of the three factors mentioned above. This observation is similarly found for other periods of historical market drawdowns, highlighting the benefits of a diversified multi-factor portfolio. Likewise, the benefits of a diversified factor portfolio are evident when considering the time to recovery from extreme drawdowns. Indeed, our analysis shows that a diversified factor portfolio exhibits lower time to recovery than investments into single factors.
We conclude that the factor performance in the first quarter of 2020 is in line with other periods of market distress and that well-balanced exposures can provide a hedge against the underperformance of specific factors, as well as against sustained drawdown periods. Hence, the observed factor performance does not call into question long-term track records that justified the adoption of multi-factor strategies.
JEL Classification: G11, G12, G14.