Factor Investor Report - March 2025
All things factor investing
“Heads we win, tails we survive”
While It’s obvious TODAY that “survival” is the need of the hour, it wasn’t so obvious back in December 24 – when our last factor report was released.
If you re-call, our risk signals gave a “100% Risk off” reading, allowing us to comfortably side-step the volatility.
Can I confess? it feel like a small victory – for us and for our readers.
Talking of volatility – India Vix spiked 65% on 7th April 25. It has since receded back to 20 but is still much lower than the US CBOE Vix at 48.
Our sense is that it’s going to be an year of whipsaws, fast rotations in sectors and styles. It will also be an year in which pain will be visible because remember – No pain, No premium !
But this volatility and pain are exactly what create mouth-watering opportunities.
To get a better sense of where we are, where we’re going and where such mouth-watering opportunities might come from, make sure to read till then end.
-Editor
1. Factor Performance Summary
The rotation between large cap and small cap is truly underway. It was quite puzzling to see last quarter large caps fall while small and micro caps held firm. In January that situation corrected itself. Largecaps were flat this quarter while small caps were hit on the chin and were down 14%. So was Momentum. Equal Weight under performed its Cap Weighted counter part by almost 7%. April has begun on a very different note where all have fallen down. Only when the dust settles will we see who is left standing.
2. Tactical Asset Allocation
In Dec 24 the model moved to 100% risk off from 70% risk off in Nov 24. This compared to 100% risk on in the Oct 24 quarter. A timely move by following a sound preset process. The kind of down move seen in Mar 25 qtr followed by the volatility in early April 25 (when this report was being written) shows how important it is to follow the rules once they have been decided.
3. Relative Returns and Risk and Returns- Annual
Momentum and Small caps took the biggest hit this quarter while surprisingly value was marginally positive.
4. Factor Ranks
This table shows the reversal and rotation that is going on in Size. Large Caps moved from 6th to 2nd place while Smallcaps fell from 1st to 6th place. Small and MidCaps had shown (surprising) relative strength in the December 24 quarter when large caps especially those in the Nifty Next 50 took a beating. That reversed in Jan and Feb 25. There was some recovery in March at an absolute level but relatively smallcaps look likely to underperform for a while. Momentum does not do well at turning points and fell from the 3rd to the 7th place.
Low Volatility performed as should be expected was the best performing factor, followed by market (largecaps) and Quality.
5. Factor Excess Return Correlations
6. Sector Ranks
In a world where where everything is down, the medicine is Pharma. But that also is only relative. Banking and BFSI has been strengthening. So is FMCG. IT is on a downward trend. Discretionary sectors like Auto, Realty and Media were the worst hit.
7. Stock Ranks
An important component of our process is ranking stocks on Risk Adjusted Momentum over a look back period of 6 months. In the table below we show the top ranked 20 stocks in our Mid and Small Cap universe. The rank is based on Risk Adjusted Momentum score. It also shows the ranking of the stock one and three months ago
8. Readings
The paper we recommend this month is Formula Investing by Marcel Schwartz and Matthias X. Hanauer
Summary
This study evaluates the effectiveness of four popular investing formulas—the F-Score, Magic Formula, Acquirer’s Multiple, and Conservative Formula—within a unified framework over an extensive period. Each formula generates significant raw and risk-adjusted returns, primarily by providing efficient exposure to well-established style factors. However, no single formula consistently outperforms across all metrics. The Acquirer’s Multiple achieves the highest returns for top decile portfolios, the Conservative Formula leads in CAPM alpha and return spread, and the Magic Formula exhibits the highest remaining alpha after adjusting for common factors. While all formulas remain successful for concentrated long-only portfolios in the post-2000 period, we observe some performance decay relative to earlier periods, underscoring the need for continuous innovation in investing strategies.
Disclaimer: Nothing in this blog should be construed as investment advice. This is purely for educational purposes only. Please consult an investment advisor before investing.