switzerlanden
Now more than ever, it’s time to think outside the Fama-French factor box

Now more than ever, it’s time to think outside the Fama-French factor box

28-04-2020 | Research
2010-2019 was a lost decade for the Fama-French factors. But alternative equity factors fared better.
  • David Blitz
    David
    Blitz
    Head of Quant Research

Speed read

  • Fama-French factors delivered negative returns over the past decade
  • It’s happened before: the 1990-1999 period saw similar returns
  • Other factors did deliver positive returns over the 2010-2019 decade
Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe

The factors in the widely-used Fama-French five-factor model1 experienced a lost decade. Over the 2010-2019 period, these equity factors – namely: value, size, profitability and investment – delivered a negative return on average, while the return on each individual factor was well below its long-term average. However, dismissing factor investing altogether based solely on this outcome would be short-sighted.

As it turns out, the dismal performance of the Fama-French factors between 2010 and 2019 is not unprecedented. New research2 by Robeco shows that, in fact, the returns of the past decade were remarkably similar to those seen previously for these four factors during the 1990-1999 period. That did not prevent the same factors from making a strong comeback during the following decade.

Moreover, we find that many time-tested alternative equity factors which are not considered in the Fama-French model did deliver a positive performance over the 2010-2019 decade. These factors include payout yield, accruals, intangibles, price momentum, analyst revisions, earnings momentum, seasonals, short-term reversal, and low risk.

From these findings, a clear dichotomy emerges: while the most commonly accepted factors experienced a lost decade from 2010 to 2019, many other factors, which the academic community often considers to be inferior or redundant, were actually the ones that delivered the highest returns during that same period.

Only time will tell if the Fama-French factors will again be able to make another comeback in the next decades

Altogether, the 2010-2019 decade turned out to be like a mirror image of the 2000-2009 decade, during which the Fama-French factors had an exceptionally strong performance and left most other factors in their wake. Only time will tell if the Fama-French factors will again be able to make another comeback in the next decades.

In the meantime, their weak recent performance will have implications for asset pricing research. For one, the five-factor model will generally have a hard time explaining strong CAPM alphas over the 2010-2019 period, as positive loadings on the Fama-French factors will not help to explain returns if the Fama-French factors themselves have no premium to begin with.

Our findings also challenge the ambition to reduce the entire ‘factor zoo’ of the hundreds of alleged equity factors reported in the academic literature to just a handful of truly relevant factors, such as the four Fama-French factors, that should explain the whole cross-section of stock returns.

Although the Fama-French factors still show a strong long-term performance, they have now experienced two lost decades during which various other factors were able to deliver. Therefore, it seems that more factors are needed for an accurate and comprehensive description of the cross-section of stock returns.

Read the related paper on SSRN.

1 This model was proposed in 2015 by Nobel Prize winner Eugene Fama and fellow researcher Kenneth French. The two researchers argued that, on top of the market factor, investors should also consider value, size, profitability and investment. In practice, the last two factors are often combined to form the quality factor. Fama-French factors are considered a standard in academic research and their definitions are widely used in empirical studies.
2 Blitz, D.C., 2020, “Factor Performance 2010-2019: A Lost Decade?”, working paper.
Subjects related to this article are:
Logo

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree