Portfolio considerations

Striking while the iron’s hot for factor premia

June 06, 2023

Bar charts showing the returns of four separate long-only portfolios: momentum, value, quality, and multifactor. The charts show the excess returns created by rebalancing daily compared with monthly and rebalancing daily compared with biannually. The returns reflect conservative transaction-cost assumptions that are doubled during high-volatility periods like the dot-com bubble bust and the global financial crisis (GFC). For each portfolio, we looked at the entire sample from January 1990 through August 2019, as well as three subperiods: the dot-com bubble, the GFC, and all other years excluding the GFC and dot-com bubble.  The charts show that maintaining a consistent factor exposure by rebalancing daily provides excess returns over nearly all periods when compared to rebalancing monthly or biannually. Throughout the total 1990–2019 period, daily rebalancing provided 1.6% of excess return compared to monthly rebalancing and 3.3% of excess return compared to biannual rebalancing in our momentum portfolio; 1.9% of excess return compared to monthly rebalancing and 3.3% of excess return compared to biannual rebalancing in our value portfolio; 0.8% of excess return compared to monthly rebalancing and 1.5% of excess return compared to biannual rebalancing in our quality portfolio; and 2.0% of excess return compared to monthly rebalancing and 3.9% compared to biannual rebalancing in our multifactor portfolio. During the dot-com bubble of 1999–2004, daily rebalancing produced 2.0% of excess return compared to monthly rebalancing and 8.0% of excess return compared to biannual rebalancing in our momentum portfolio; 3.5% of excess return compared to monthly rebalancing and 7.0% of excess return compared to biannual rebalancing in our value portfolio; 5.7% of excess return compared to monthly rebalancing and 6.7% of excess return compared to biannual rebalancing in our quality portfolio; and 1.7% of excess return compared to monthly rebalancing and 7.2% of excess return compared to biannual rebalancing in our multifactor portfolio. During the GFC of 2008–2009, daily rebalancing produced 4.3% of excess return compared to monthly rebalancing and 2.9% of excess return compared to biannual rebalancing in our momentum portfolio; 5.1% of excess return compared to monthly rebalancing and 4.3% excess return compared to biannual rebalancing in our value portfolio; 4.2% of excess return compared to monthly rebalancing and 3.0% of excess return compared to biannual rebalancing in our quality portfolio; and 6.6% of excess return compared to monthly rebalancing and 5.9% of excess return compared to biannual rebalancing in our multifactor portfolio. For all other years excluding the dot-com bubble and the GFC, rebalancing daily produced 1.3% of excess return compared to monthly rebalancing and 2.1% of excess return compared to biannual rebalancing in our momentum portfolio; 1.2% of excess return compared to monthly rebalancing and 2.2% of excess return compared to biannual rebalancing in our value portfolio; and 1.6% of excess return compared to monthly rebalancing and 2.7% of excess return compared to our multifactor portfolio. The exception for this period was in our quality portfolio, where daily rebalancing underperformed monthly rebalancing by 0.8% and biannual rebalancing by 0.2%

Contributors

Matt Jiannino

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