Equity factor premiums have underperformed relative to the expectations of many investors, but the longer history suggests that holding a portfolio constructed around an equity risk factor would have outperformed the market risk premium. If you are an active trader, you care about recent performance. If you are a longer-term allocator, you care about playing the odds from large samples.
This, of course, does not mean that holding equity risk premia are risk-less either in the short or long-run. It does mean that care should be taken in the selection across time and the business cycle. There is time risk - some factors will underperform for an entire decade. There is also business cycle risk. Equity factor premia will change with economic growth.
We can draw some general long-term conclusions across equity factor premia.
In 6 of 9 decades, all equity factor premiums beat the market portfolio.
Only once was market risk in the top two spots in a decade and never in the top spot.
Momentum has done better than the market risk premium in every decade.
In only one decade was momentum not in the top two spots.
Low volatility has generally been a lower return premium except for the recent period.
The differential between the best and worse equity factor premium was never more than 10%.
Regardless of current factor premium dislocations, it is worth focusing on differences in core risk premia.
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