Report: March 2023 Factor Performance Analysis

Alex Lustig | April 13, 2023

Investors Favor Quality over Volatility

Market Background

2023’s first quarter ended on a strong note, continuing the momentum seen in 2022’s final quarter following a bear market. Both Developed and Emerging Markets chipped away at the losses from early 2022, returning 18% and 13.7% respectively for the last 6 months.

The IMF recently reported that they expect global growth to fall to 2.8% in 2023 from 3.4% in 2022. Advanced economies are expected to see a more significant slowdown at 1.3% this year due to stubborn inflation, financial sector turmoil stemming from recent bank failures, ongoing war in Ukraine, and growing geoeconomic fragmentation.

Investors continued to favor Quality equities from a factor perspective, but this month they also began allocating towards Growth equities while shifting away from Value and Volatility. Historical growth metrics such as sales growth and earnings growth are associated with this form of growth outperformance that works in tandem with Quality. This differs from the speculative growth metrics used to define Growth such as forecasting growth over 12 months, a subfactor which tends to outperform alongside Volatility.

US year-on-year inflation fell to 5.2% in March from 6.0% in February. Paired with a cooling US labor market, this suggests the aggressive rate increases have begun affecting the economy, which may affect the Fed’s decision on further rate hikes in their next meeting on May 2nd.

MSCI Europe performed the best in the quarter with 9.43% return while the S&P 500 returned about 7.03%. MSCI Emerging Market’s low February returns decreased its quarterly gains to half that of the S&P, at 3.54%.

Natural gas prices continued falling in March, totaling to a 46% price reduction since the new year. Crude Oil prices fell by 2.4% this month, totaling to a 5.5% fall in prices since January. Bitcoin’s March return of 19% brought the asset’s quarterly gain to a whopping 68%.

Treasury Yields fell in March, resulting in a net decrease for the quarter. The U.S. 10 year-yield bounced between 3.5-4%, closing at 3.48%. The 10-year GILT also fell back to its level from October of last year, and the German 10-year yield increased by a similar proportion as the U.S to 2.3%.

Factor Summary

  • US Equities: Value and Yield underperformed this month – Growth, Quality, and Large Caps outperformed by a considerable margin. Volatility slightly underperformed.
  • Europe: Value and Yield underperformed by a smaller margin than the US. Although Quality and Size also beat the market, Growth offered marginal outperformance.
  • Emerging Markets: Continuation of last month – Value, Yield, and Quality outperformed while Growth and Volatility continued to underperform.
  • Canada: Value and Yield reversed their trend from last month, underperforming by over 110 bps. Growth and Quality outperformed, although different subfactors than the US.
  • UK: Similar trend to Europe on a larger scale – Value and Volatility underperformed by 160-180 bps. Size and some Quality subfactors were the only ones to marginally outperform.

US Equities

Volatility stocks lost most of their gains from February as it was the worst performing factor in March. Opposed to earlier in the quarter, where volatile 10Y yields muddled the Value/Growth debate resulting in unclear outperformance for either, March revealed a slight preference for high Quality Growth stocks over Value.

Investors realized a similar reversal in the third quarter of 2022, wherein Growth’s outperformance over Value was short lived. Whether this trend continues leaning towards Growth in the upcoming months largely rests on the Fed’s reaction to the March CPI report, set to be released later in April. Further increases in the federal funds rate from the current 4.75-5.00% range could tamper with extended outperformance for Growth companies.

Companies with low gearing ratio continued to outperform throughout the quarter, trailing market beta (a volatility subfactor) by 2% and five-year sales growth (a Growth subfactor) by 1.7% for the quarter.

Figure 1: March 2023 US Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

European Equities

The first quarter of 2023 provided extended equity returns in Europe. Although the strong performance was on a smaller scale than last quarter, European equity markets outperformed all other regions in this report at 31% over the last two quarters, trailed by the US and Emerging Markets at 14.7% and 13.7% respectively.

Opposed to January and February, Europe’s factor performance trend in March lined up with that of the US. Both Value and Volatility stocks underperformed up to 100bps while companies with good Quality metrics such as low gearing and return on equity outperformed by up to 80bps alongside large cap stocks.

Figure 2: March 2023 Europe Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

Emerging Markets Equities

Emerging Markets continue to diverge from Developed Markets throughout the first quarter, which is exasperated by March’s factor performance trend.

March realized similar factor performance to February, except nearly all Quality subfactors outperformed and surpassed both Value and Yield stocks, which have been outperforming the last year.

The focus on Quality nets out any underperformance from February, leading to Quality-focused stocks with strong net profit margins and stable sales growth to outperform by 80bps in the quarter after trailing the market in the last six months. 

Factors are still over and underperforming on a smaller scale in their respective market than in the US or Europe, as most other factors have a premium/discount of less than 50bps.

Figure 3: March 2023 Emerging Markets Factor Performance (country and sector adjusted).
Source: Investment Metrics, a Confluence company

Canadian Equities

In March, equity markets returned about 3.8% in Canada. February’s worst performing subfactors -book to price, three-year volatility, and sales growth- rebounded by about 100bps from their lowered values in February except for sales growth, which outperformed by an additional 100bps this month.

Quality and Growth performed slightly differently in Canada. While sales growth stability outperformed by roughly 50 bps, return on equity underperformed by over 120bps, deviating from the rest of the developed markets although Canadian Value and Yield companies performed in a similar fashion as their counterparts in the US and Europe.

Throughout the quarter, investors adopted a defensive stance by prioritizing companies with a robust dividend yield, high dividend growth, and a strong earnings yield, while reducing their exposure to most growth subfactors and, in particular, distancing themselves from Volatility. 

Figure 4: March 2023 Canada Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company

UK Equities

After outperforming the US and Europe in February, the UK’s equity markets underperformed every other region in this report in March. This led to the U.K. realizing the worst performance this quarter at just 5.6%, beating out only US Small Cap which returned 2.84% in the quarter.  

Unlike many other regions in March, Growth stocks in the UK marginally underperformed, roughly in line with the market. Technically, Quality was the only factor to outperform in the form of return on equity and low gearing, but just by 40bps overall.

The underperformance of Value and Volatility subfactors this month significantly reduced the gains of volatile stocks from January and February, indicating a temporary pause on Value’s outperformance over Growth.

Figure 5: March 2023 UK Factor Performance (sector adjusted).
Source: Investment Metrics, a Confluence company


Each factor’s performance is based on the relative performance of that specific factor’s top 50% of stocks (by market cap) compared to the overall market (the sole exception is the Size factor which uses the top 70% of stocks). For example, for the first factor, Book-to-Price, we determine the period’s performance of the basket of stocks with the highest Book-to-Price values relative to the total market.

Each factor is analyzed independently, market and fundamental data are adjusted so that the sector-average (within each country) relative data is used, and the performance measurement isolates the factor’s contribution to return. For example, in Figure 1, US stocks with a high book-to-price (i.e., high-value stocks as measured by book-to-price) underperformed the broad US market by 110 bps on a sector-adjusted basis.


The information contained in this communication is for informational purposes only. Investment Metrics, a Confluence company, is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

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