Year-to-date, what has worked for portfolios is beta, financial leverage,value, small cap,and momentum. What has not worked is quality (high ROE and high free cash flow), large cap,and growth. However, none of this has been in a straight line, making excess returns a challenge for market participants this year.
After making money in October,high beta, small cap and momentum lost ground in November — no surprise given the sharp fall in the leading indices. However, the surprise was that quality stocks lost money. Instead what protected portfolios was value and large caps.
Indeed,value has notched up its second successive strong month and its best showing in years. Growth stocks took a hit in November which we think has created a buying opportunity in them.
As interest rates fell during the month, financial leverage quietly outperformed the market. Junk has
beaten quality,value has outperformed growth,
defensive have lagged cyclical,and small cap has topped large cap cumulatively since June 2015.
The demonetisation move by the government has rattled growth expectations and consequently the market. A much needed correction has happened in the broad market which we think is now more reasonably priced. On the whole, quality continues to lag the market in 2016 after being the star performer since the global financial crisis.