Quant Investing


Happy New Year everyone! Hope you all had a great holiday season full of great food, family, and a lack of financial market news and data. I just returned from two weeks with my entire family, plus my wife’s family, down in Coconut Grove, Fl in a great Airbnb rental. It provided a much needed rest and re-charge particularly from the markets. Now, its time to get back to business in 2017. For the first couple of posts this year I’ll do some looking back at 2016 performance. Today I’ll cover 2016 total returns for the various quant strategies I cover here on the blog.

A quick reminder that all quant strategies are described in the Portfolios section of the blog with a link to historical posts. OK. Without further ado, the table below list the 2016 total return for the quant portfolios and their respective max daily drawdowns for the year a well as some relevant benchmarks.

All the performance data for the quant portfolios is generated in Portfolio123

Note: TAA bond performance is with original bond ETF list.

It was a bang up year for the quant portfolios. The best returns since 2013. The average performance over the 8 quant equity portfolios listed was 25.3%. This compares with 12% for the SPY and 4.9% for Foreign stocks. The Value Composite Strategy led the way with a return of 36.6% for the year. Most of this return was in the second half of the year particularly when the US market started breaking out in July. Brining up the rear was the Consumer Staples strategy with a return of 15.1% for the year. The staples portfolio was up about 20% by summer and gave back some gains as rates rose towards the end of the year.

On the bond side, the TAA bond quant handily beat any of the overall bond indices. As bonds peaked in summer, way before the election, the quant strategy scaled out of long bonds first then everything pretty much except junk bonds. I think 2017 will be quite interesting for this bond portfolio particularly if rates continue to rise. It will be a big test.

One thing I’d like to note here is that these strategies are more than just about the sector or factor that describes them. Sure, the Staples and Utilities strategies are about stocks in that sector but also about value. Below are 2016 total return numbers for various sectors and factors. Compare for yourself.

Finally, I get asked a lot about the sustainability of these strategies. Really, no one knows but so far so good. The majority of the quant strategies are value strategies, a few combine value and momentum, and one is pure momentum. These are the two longest lasting and proven factors in markets. The strategies are based primarily on these two factors. More to this point. Many of these strategies and concepts were introduced by O’Shaughnessy in What Works On Wall Street in the first edition in 1997. The 4th edition was published in late 20011 and contains returns through the end of 2009. So, investors have had access to these strategies for 20 years. How have they done since? Below are returns for the strategies I track since the beginning of 2009 (the start of the latest bull market).

Average annual returns since 2009 (8 years) across all strategies is 21% vs 14.4% for the SPY. Not bad I would say. Only wish I had discovered these strategies earlier. But they, in combination with TAA strategies have changed my investing 100% since early 2012.

In summary, 2016 was a great year for quant strategies overall. In the next post I’ll update my overall portfolio returns and statistics tracking which also includes TAA and buy and hold strategies.

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16 thoughts on “ Quant strategies: 2016 performance review

  1. This post is a very compelling reason to use more than one strategy! The TAA I used last year underperformed all of the quant strategies you listed here.

    1. TAA should underperform Quant most of the time. It’s those bear markets where TAA should shine and quant will underperform.


  2. Paul, is everything you need to build a quant in P123? Or, do you still have to do repeated filters and downloads in Excel to get your initial list of stocks?
    Thanks for all your continuing support.

    1. ‘It’s all in there’ like some old ad campaign I can’t remember the name of right now….
      No excel needed.


  3. Thanks Paul for all the year end up dates. I hope you have a great New Year too.
    I was wondering if you have the yearly performance for the Int’l(ADR) TV2 you occasionally have talked about. Thanks again.

  4. Do the performance numbers factor in taxes and transaction costs? Congrats on a great year and a great blog!

    1. No. Too highly individual. But take a $100K portfolio. Say $6 per trade and the portfolio (25 stocks) turns over 100% in the year. That’s $300/yr in commissions. Slippage can be kept pretty close to zero for a 1yr holding period. So, that’s 0.3% per year for $100K portfolio. less for larger portfolios. If running multiple portfolios you don’t need to have 25 stocks in each portfolio, 10-15 is enough.

      As far as taxable accounts, losses can be sold just before the 1 yr holding period, gains can be sold just after the one year holding period. Easy tax management.


  5. Paul,

    Thanks for your ongoing support for each and all of us out here.

    In the 11/22 post, you mentioned getting trades for $5 or even $1. I don’t know where or how. And, in the past you have spoken highly of TDAmeritrade, possibly in another context. Also, in Portfolio123, they have Interactive Brokers in their Trade option. What is your preference for brokerage house for quant portfolios? And, how do you get the best price from them?

    1. TradeKing charges $4.95 per trade. Interactive Brokers charges $0.005 per share. A new mobile app, RobinHood has free stock trades.
      Wells Fargo gives you 100 free trades per year in their brokerage platform. But with all these you have to weigh low cost vs services. I like the total services at TD, and I’ve been with them long enough where I get a significant discount to their published fees. And of course, with more assets you can usually negotiate lower fees.


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