Factors in Canada: “New Leadership”?

Let me start by suggesting that tomorrow be decreed International vaccination news day – as a nod to the fact that it was 6:45 am (EST) November 2020 that the news of a Pfizer / BioNtech vaccine surprised virtually EVERYONE …

That said, I wanted to take a look at factors through the pandemic, albeit an incomplete one (so more on that front in a future post), as it only takes iShares “factors” solutions into account.

Each “Factor” (yield; minimum volatility; growth; value; size; quality) can be expected to perform differently, not only from other factors (otherwise what would be the point), but also, and perhaps just as importantly, may produce different results dependent on the “fishing pond” the factors are having to work with (Canadian market versus US market, versus International Developed, EM, etc).

Looking at their respective performance through the period of January 2020 (just as the pandemic started), until now, respectively from October 31, 2020 (a mere 9 days or so before the original Pfizer / BioNtech vaccine news) could prove interesting, or so I thought … What do you think?

Here is what Jan 31, 2020 to Oct 31, 2021 looks like:

and then, breaking it up in two specific periods (Jan 2020 to Oct 2020):


Respectively October 2020 – October 2021 (essentially starting 9 days pre-COVID-19 vaccination news game changer):

What do the above charts suggest, or illustrate?

I’d argue that they demonstrate important shifts in relative performance pre/post vaccine news:

  • through the Jan 31-Oct 31 2020 period, note that dividends and value look to have performed the worst, with Minimum volatility faring only marginally better. Interestingly, multi-factor, which looks to have dipped further than the market (XIU) initially, rebounded the best (from the visual above), to subsequently track the market closely into late October 2020.
  • Growth, through that period, dominated (the lack of Energy presumably helping in no small manner here)

Now flip into the frame showing us what happened since October 31, 2020 (9 days prior to vaccine news):

  • Value has dominated, followed by dividends (in a flip of relative performance), while both Growth and Multi factors have taken the underperformers’ roles.
  • Minimum Volatility, effectively, has regained some relative ground, AFTER (presumably) surprising many in a not so positive way (downside participation 2020 significantly greater than what targeted volatility framework would have suggested), but now back on the upside capture closer to the 80% historical range (in fact exceeding it YTD at 85%).
  • As both Value and Dividends are significantly overweight Financials and Energy, and are continuing to lead the broader TSX higher, this suggests to me – for Canada, at least – that Sectors (Financials and Energy in particular) more than factor labels, if you will, will dictate the future path of performance of these factor strategies. With Banks set to resume dividend increases following last week’s OSFI news, and Energy of late embracing fiscal discipline (aka returning cash to shareholders in the form of significant dividend increases, respectively share buybacks) … presumably at this stage, absent setbacks on the road to leaving COVID-19 in the rearview mirror, respectively unexcepted development on either the monetary front (excessive tightening), or economic front (inflation / energy related shock), this leadership should continue into 2022.

This ought to perhaps particularly be so as Canada’s stock market performs its traditional pro-cyclical role for international investors. This, for investors, may further be benefiting from the perception that some of that cyclical exposure – oil and materials in particular – can be used as inflation hedge. Fingers crossed the reopening doesn’t get derailed through the winter ahead!