Has the style/factor rotation in 2023 been as significant as received wisdom believes?

Exhibit 1 plots the relative performance of the FT Wilshire Large Cap Growth style index versus the Large Cap Value style index.

It shows the +29.2% outperformance of the Growth style (the difference between the 34.9% return from Growth and the 5.7% return for Value) YTD to the end of August. This is almost a mirror image of the -27.1% underperformance of Growth v Value witnessed in 2022.

This all feeds the narrative that the last two years have seen significant volatility and rotation between style and factor indices…

‍

Exhibit 1: Relative performance of the FT Wilshire large cap Growth v Value style indexes.

^{Source: Wilshire. Data as of August 31, 2023.}

…however, through the prism of 'Pure factors' the rotation has been subdued.

The FT Wilshire large cap Pure Factors are designed to neutralize unintended exposures such as sector skewing that distort the genuine factor signaling embedded in standard style and factor indexes.

Exhibit 2 shows the absolute return delivered by the FT Wilshire Pure factors YTD. While Quality (a proxy for the Growth style) has been the best performer returning 21.8% this is not as strong as the 34.9% returned by the Growth style). This reflects the distortion that the Technology sector and other off-target exposures have on the style indexes.

Exhibit 2 also shows that the Value Pure Factor posted YTD (to end of August) return of +19.2%, compared with a Value Style return of +5.7%). Importantly, the Quality pure factor only marginally outperformed (+2.6%) the Value pure factor YTD.

‍

‍Exhibit 2: The YTD absolute return for the FT Wilshire Pure Factors

‍^{Source: Wilshire. Data as of August 31, 2023.}

‍

Two perspectives: Gut wrenching rotation versus a smoother ride

Exhibit 3 compares the relative performance of the Growth v Value style indexes (red) with the relative performance of the Pure Growth v Pure Value factor (blue) since the start of 2022.

As we discussed earlier, through the prism of style index rotation market participants have had to contend with gut wrenching rotation. By contrast, the pure factors have produced persistent outperformance of the Quality factor, with significantly less volatility - all in all a much smoother ride.

‍

‍Exhibit 3: Comparing the trajectory of style and pure factor relative returns since 2022.

‍^{Source: Wilshire. Data as of August 31, 2023.}

‍^{MM-422653 E1123}

‍

‍