The poor performance of the Fama-French factors over the last decade has led many to question the existence of the premiums. But new research shows that those 10 years were not unique, and that factor-based investing have prevailed following periods of underperformance.
Much attention has been paid to the fact that the decade 2010-2019 saw negative annualized returns to the Fama-French size (-0.39%) and value (-2.60%) factors. The two newer Fama French factors, investment (0.22%) and profitability (1.67%), both produced positive annual average returns, though both were well below their historical averages. The four factors together produced a slightly negative annual average return (-0.28%). The performance was particularly poor relative to the annual average return of 13.10% for the market beta premium, well above its historical average.
In his March 2020 paper, Factor Performance 2010-2019: A Lost Decade?, David Blitz observed that the negative performance of the Fama-French factors over the decade was not that unusual, demonstrating that it was a virtual repeat of the decade 1990-1999. During that period, the annual average premiums were: size, -2.11%; value, -0.13%; investment, -0.04%; and profitability, 2.22%. Together, the four Fama-French factors produced a slightly negative annual average return of -0.02. That negative performance also was particularly glaring given that the annual average market beta premium was 12.76%, well above its historical average.
Blitz also observed that during both these decades, the annual average momentum premium was positive – 13.49% from 1990 through 1999 – and 3.45% from 2010 through 2019. He also found similar results in international markets, with strong results for market beta and momentum, but much weaker or negative results for the Fama-French factors.
