In this paper, we apply the concept of Longest Underperformance Period to factor-based portfolios and show that even factor-based portfolios that do outperform over the long haul can have shockingly long stretches of underperformance. Just like funds, factors can go through extremely long periods of underperformance.
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Even if factors have outperformed their counterparts, they can go through underperformance periods that last at least a decade, sometimes multiple decades.
The ever more popular factor-based investing, such as strategic beta (also called smart beta), can fail to deliver for very long time periods.
It is typically more sophisticated investors and advisors that seek such factor exposures through funds or ETFs.