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Inflection Points in Rolling Excess Return

  • Oppenheimer Asset Management
  • March 9, 2021
An analysis of style return winning streaks and their impact on forward return variance.

Index performance can be fleeting as investing styles tend to fall in and out of favor quickly. This is evident when you look at rolling one-year excess returns of the S&P 500 Growth and Value indexes. Examining excess rolling returns over prolonged periods provides clues to the sustainability of winning streaks and helps spot inflection points.

outliers chart - Rolling one-year excess returns (1/31/95-12/31/20)
outliers chart - Rolling one-year excess returns (1/31/95-12/31/20)

The return disparity between growth and value hasn’t been this pronounced since the dotcom boom. The one-year rolling excess return of growth over value is currently 32.1%, well above the one standard deviation band. The figure was slightly higher at the end of the third quarter at 33.3% but, prior to that, there hasn’t been a greater rolling one-year excess return of growth over value since the tech boom of 2000. Although growth companies have received the majority of investor and media attention over the past few years, growth has averaged just a slight return premium over value since 1995.

Divergence among Russell indexes rivals tech bubble levels. The rolling one-year excess returns are even greater within the Russell 1000. The Russell 1000 Growth Index currently has a 35.7% annual excess rolling return over Russell 1000 Value, above the standard deviation upper band of 12.9% and 40-year average of 0.9%. Outside of the third quarter of 2020, the divergence hasn’t been this wide since 2000. Russell Mid Cap Growth currently has a 30.6% annual excess rolling return over Russell Mid Cap Value, in excess of the upper standard deviation band of 16.5% and far greater than the 35-year average of 0.7%. The divergence hasn’t been this wide since 2000.

Rolling excess returns have revealed inflection points. It’s important to examine what happens to forward returns when past rolling excess returns reach a significant level. By looking at forward returns, an investor can better contextualize and predict how durable excess returns are over time. We calculated one- and three-year returns when trailing one-year excess rolling returns were greater than 15% since 1995—for both growth and value. We’ve identified average forward returns for this period.

Mean Reversion  Chart
Mean Reversion  Chart

When performance divergence was 15% or greater, the mean reversion has been pronounced. Since 1995, on a trailing one-year performance basis, S&P 500 Growth beat S&P 500 Value by 15% or more 27 times (monthly) for an average of 21.9%. As of Dec. 31, 2020, the trailing one-year divergence between S&P 500 Growth and S&P 500 Value was 32.1%. When trailing performance diverged by more than 15%, value outperformed growth by 4.8% over the next year and 8% in the next three years.

Spotting inflection points in style returns can be a useful tool. It’s important to keep significant return variances in perspective. When examining historical returns, most of the time the style that was deeply out of favor then outperformed on forward one- and three-year periods.


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