Quality and low volatility indices outperformed during the COVID-19 financial crash, which saw the Australian share market drop 35.9% between February 20 and March 23, according to new research coming out of S&P Dow Jones Indices.
During the crash, most factor indices' performance aligned with their long-term characteristics, S&P Dow Jones Indices APAC global research and design director Liyu Zeng said. However, the outperformance of the low volatility index was not as pronounced as previous market sell-offs.
"According to the factor attribution, both the style factor exposures and stock-specific risk positively affected the return of the S&P/ASX 200 Low Volatility Index," she said.
"However, the strong industry bias to REITs (one of the worst-performing industries during this period) severely dragged the index return and eroded the outperformance of the index."
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With markets rebounding following a series of health and safety measures, interest rate cuts and stimulus packages, the S&P/ASX 200 rebounded from its March 23 lows.
In the past, momentum, quality, and small-cap indices tend to outperform during bullish markets, while value, dividend and low volatility typically underperform, Zeng said.
"However, in this recent rally, the S&P/ASX Quality Index underperformed the S&P/ASX 200 by 3.8% while the S&P/ASX Dividend Opportunities Index outperformed by 2.3%," Zeng said.
The Quality Index' targeted exposure to profitability and leverage contributed positively to its return, but its exposure to short-term momentum negatively impacted the index.
The dividend yield and value factors generated negative returns for the Dividend Opportunities Index, however, its overweight exposures to metals and mining, utilities and consumer discretionary, and its underweight exposures to consumer staples and REITs, contributed positively to returns.
Overall, momentum and quality factors outperformed their value peers during the first half of 2020, Zeng said.
"The S&P/ASX 200 Momentum and S&P/ASX 200 Quality Index were the best-performing Australian factor indices in the first half of 2020, while the S&P/ASX 200 Enhanced Value performed the worst," she said.
"Most factor indices aligned with their long-term cyclical characteristics, with a small number of them showing different behaviour largely due to industry biases and unintended factor exposures."