Numbers for the first quarter of 2018 are now officially in and they don’t look good. According to index house S&P Dow Jones, “Global markets, which started to pull back in late January, continued in early February and then stabilized, as March saw the return of the declines.  The damage was broad, as March’s 2.16% decline combined with February’s 4.29% decline to overpower January’s strong 5.33% gain, resulting in a loss of 1.36% for Q1 2018. “

Once we get past these big aggregate numbers, most investors tend to focus on different geographies (UK vs US) and then varying sectors. What I find equally interesting is to understand how different types of stocks have performed. I’ve got a Money Week article coming on this subject in a few weeks time so I won’t steal too many of the ideas but a very easy way to understand how different styles and factors perform over time is to use a good old-fashioned heat map of returns. The one below is from Nicolas Rabener of Factor Research – you see the original online at

This one chart nicely sums up some key trends for equity investors over the last decade – low vol and quality stocks have done well as have stocks with high relative price strength (momentum) whilst strategies such as high dividend yield have had a more variable ten years. Multi factor strategies have tended to stick in the middle of the distribution of returns, as you’d expect. The stand out trends for me though is on the downside – the small cap premium has slowly wasted away whilst value stocks have also had a torrid decade. Value stocks, as defined in a factor, have produced negative returns in 7 of the last ten years. Crucially value stocks have had a grim start to 2018 – their negative returns are only just behind the worst strategy which was to focus on high dividend yielding shares.

Putting all this together we could make two points. As an investor, quite the worst strategy of the last decade has been to invest in small-cap value stocks. You’d have been on the receiving end of a double whammy of dreadful numbers.

I also think that this double whammy poses a much more profound question – aren’t all factor premiums vulnerable to style decay. By this I mean that investment is incredibly vulnerable to the observation principle i.e that once a phenomenon or anomaly is spotted and acted on, it tends to lose its predictive power. Investment strategists call this alpha decay.

Of all the styles of investing value investing is perhaps the longest established and most reputable. Lots of intelligent, grey-haired men have been fortunes from investing in stuff that makes sense. Buy cheap, sell high. If Warren Buffett says so, it must be right. Obviously over time these styles of investing drift a little and Buffett has drifted far from classic deep value Graham stocks and is probably now closer to a quality investor.

But the principle remains true. Ask most investors which tribe of investing they probably belong to, my bet is that value is probably the most popular. To be a momentum investor is to be tantamount to speculation while growth seems a little too flashy and fixated on shiny big trends. Value, as I said, makes sense.

Except that the numbers from recent years suggest that it doesn’t….As investment strategies have become popularised with endless Little Books about every nook and cranny of value investing, arguably the value premium has eroded to nil.

Logically though value stocks will revert, won’t they? Surely at some point, all those expensive quality stocks will be exposed for what they are? Possibly but I increasingly have my doubts. My worry is that there’s been a profound paradigm shift in markets. Investors have pounced on the trends and strategies and arbitraged them away. DylanGrice of Calibrium (via his Popular Delusions note) has been riffing on the same heretical idea and has wondered aloud whether the value effect is now too widely observed – the anomaly has been exploited and is over. Styles and even factors might increasingly be redundant as equity correlations get ever tighter and machine learning and AI strategies practised by hedge funds drive out any market inefficiencies. Quant-based investing might actually kill off its golden eggs, forcing investors to look even deeper into the numbers to find new trends.