OppenheimerFunds Factor Investing: A Year in Review
Along with many market observers, we anticipated that the positive global market performance in 2017 would continue through 2018. However, U.S.-China trade wars, slowing Eurozone economic momentum, and political turmoil in Italy have continued to drive global markets into negative territory. 

Having launched the Oppenheimer Factor ETF suite one year ago, we can now reflect on the macroeconomic environment over the past year and gain additional insights from the cyclical nature of individual factors.

One-Year Factor Performance Recap

The MSCI EAFE and Emerging Markets Indices have continued their slump and are down 8.0% and 13.9%, respectively, year-to-date.  And while it spent most of the year in an upward trend, the U.S. market is seemingly no longer safe from these global issues, as the S&P 500 Index gave back most of the year’s gains in October, and is now up just 5.7% year-to-date, down from a high of 11%.   

Given this year’s market volatility, reviewing the behavior of factors offers an interesting perspective. For example, it’s no surprise to us that the quality and low volatility factors have performed well over the past year, up 10.9% and 10.8%, respectively, as they tend to do well in volatile markets.  On the other hand, the more pro-cyclical value and size factors have lagged the market, up just 8.1% and 6.9%, respectively. Exhibit 1 offers key risk and return statistics for each of the U.S. single and multi-factor indices that OppenheimerFunds’ ETFs track, shown since the inception of the Oppenheimer Factor ETF suite.

Exhibit 1: Key Risk and Return Statistics for Factor Indices

Linking Macro Regimes and Factor Performance

The ability to adapt factor exposure based on the market environment enabled the Russell OFI Dynamic Multifactor Indices to outperform their respective benchmarks over the past year. These factor exposures are determined by the OppenheimerFunds Multi-Asset Team’s rules-based macro regime identification process. Exhibit 2 illustrates the regimes identified by this process over the past year and corresponding single-factor performance during each period.

Exhibit 2: Macro Regimes and Factor Performance

During the fourth quarter of 2017 and into early 2018, we witnessed a transition from a slowdown to an expansion, characterized by accelerating growth across the globe, low volatility across asset classes, and enthusiasm in the United States about corporate tax reform and fiscal spending.  The factors targeted by the Russell 1000 OFI Dynamic Multifactor Index during this expansion period included momentum, value, and size, all of which generated better returns than the more-defensive low volatility and yield factors.

The global economy began to show clear signs of deceleration in the second quarter, led by Europe and the emerging markets, as trade tensions and political turmoil in Italy heated up. As a result, the Russell 1000 OFI Dynamic Multifactor Index shifted into a slowdown regime, which proved timely as the low volatility factor began to make a comeback and quality was the best-performing factor during the quarter, up 5.0%.

Throughout the third quarter and more recently, global risk appetite has weakened to levels last seen in mid-2015, suggesting slowing economic growth ahead. In addition to intensified trade wars with China, widening Italian bond spreads continue to drive global market weakness, as investors grow more concerned about resurfacing European contagion risks. The Russell 1000 OFI Dynamic Multifactor Index remains in a slowdown regime today, and is therefore maintaining its defensive positioning with tilts toward the low volatility and quality factors. This has proven effective during the recent market volatility, as these factors are up since July 1, 6.7% and 2.0%, respectively.

Exhibit 3: Russell 1000 OFI Dynamic Multifactor Index versus Russell 1000 Index Excess Return

The Russell 1000 OFI Dynamic Multifactor Index, which changes factor exposure based on the business cycle and global market sentiment, has continued to outperform the Russell 1000, and even delivered better performance than any single factor over the past year. While there is merit to statically allocating to factors over time, we believe the past year is a great example of how an adaptive strategy can provide investors with a favorable experience versus a static approach. We will continue to monitor leading economic indicators and global market sentiment, factor positioning and the subsequent performance of the Russell OFI Dynamic Multifactor Indices to gather further evidence that factor rotation can add value to investors’ portfolios over time.