The performance derby between actively managed portfolios and passive benchmarks is strongly influenced by market conditions. Active manager success rates are cyclical, but not random, and are driven by slippage created from style, size, and weighting considerations that result from the imperfect slotting of active portfolios into single style boxes. Moreover, this slippage can be defined and measured, and shows a clear correlation with relative return spreads between benchmarks and their opposite boxes.
Factor analysis is a point of emphasis in Leuthold’s tactical research activities, and this note summarizes our Factor Tilt outlook going into the fourth quarter. Factors are return drivers such as Value, Momentum, and Quality, and research has found that factor results vary over time—but that does not mean they are random.
On October 3rd, the S&P 500 briefly traded below the high it made in January 2018 before reversing to close the day higher.
Factors provide investors with the ability to shift their portfolio’s characteristics to fit a particular economic and market outlook. Value might look appealing under one set of conditions while Quality might be more desirable in another. We developed a research platform that analyzes various drivers of factor returns, summarized in Exhibit 1.