Napoleon insisted he would rather have his generals be lucky than good. Increasingly, especially when investing in the US stock market, many investors opt for a passive fund, presumably viewing markets through the same prism that managers are really only ever lucky, as opposed to good. Yet many still choose active funds for a variety of reasons: a preferred investment style (or factor bias), or an alignment between the investor and the manager on the macroeconomic outlook are chief among them. For these investors, forming a view on when different styles are likely to perform, and on which macroeconomic environment we are likely to see is crucial. In this article we look at how different factor indices in North America have performed in different economic and market scenarios. We then examine which US-focussed trusts have offered the closest correlation to these factor indices in the recent past. Understanding the impact that broader economic trends have had on the performance of factors – and, by extension, on trusts that seem to operate in close alignment with those factors – can help us to understand and contextualise historic performance. It may also give us some insights on how to position for any anticipated future environment, although there can be no guarantee that historic patterns will repeat.
