Factor investing on NEPSE: do value, quality or momentum beat the market?
Around the world, a large part of professional money is run by rules: buy the cheapest stocks, or the most profitable, or the ones that have been rising, and rebalance every month. This is factor investing, and in big markets some of these rules have beaten the market for decades. Nobody has checked whether they work on NEPSE - so we did, after trading costs. The answer surprised us, and it says a lot about how NEPSE is different.
The five classic factors
- Value - buy companies that are cheap against their earnings.
- Quality - buy companies that earn a high return on their equity.
- Growth - buy companies whose earnings per share are rising fastest.
- Low volatility - buy the stocks whose prices swing the least.
- Momentum - buy the stocks that rose most over the past six months or so (skipping the latest month), on the idea that winners keep winning for a while.
Each factor is tested the same way: every month, rank the stocks, hold the top-ranked group, and compare it with the market - after paying broker commission and fees both ways, and only among stocks that trade at least Rs 20 lakh a day, so the results could actually be traded.
What the data shows: a glimpse
| Factor (top-ranked stocks) | Against the market, a year, after costs | Tested over |
|---|---|---|
| Quality (return on equity) | +1.2% | Nov 2024 - Sep 2026 |
| Growth (EPS, year on year) | -0.7% | Nov 2024 - Sep 2026 |
| Low volatility | -0.9% | Jun 2022 - Sep 2026 |
| Value (earnings yield) | -1.2% | Nov 2024 - Sep 2026 |
| Momentum | -7.7% | Jun 2022 - Sep 2026 |
None of the five has beaten NEPSE reliably. Quality is the only one ahead, and by too little, over too short a time, to call it proven. The striking result is momentum: buying the recent winners lost about 7.7% a year against the market. On NEPSE, stocks that had run up tended to give the gains back - which fits what we see elsewhere in the floorsheet, where fast rallies driven by a few buyers often end in distribution (see cornering on NEPSE).
Value, quality and growth need two years of comparable published results, which is why they are tested over a shorter period. They are worth re-checking every year as the history grows.
Global case study: value's lost decade, and momentum's crashes
Even in the largest markets, factors go through long dry spells. In the US, value stocks - the cheap ones - trailed growth stocks for most of the decade from 2010 to 2020, as low interest rates rewarded companies whose profits lay far in the future, above all big technology firms. Many investors gave up on value entirely.
Then rates rose. In 2022, as the Federal Reserve raised rates fast, the index of US large-company growth stocks fell by roughly 29%, while the value index fell only about 7.5%. A decade of lagging was partly reversed in a single year.
Momentum has the opposite problem: it tends to work steadily for long stretches and then crash. In the spring of 2009, as markets bounced off the bottom of the financial crisis, the most beaten-down stocks - banks and others that had fallen furthest - rose the fastest. Momentum portfolios, holding the safer recent winners and avoiding the losers, suffered some of their worst months on record.
The lesson is the same in New York and in Kathmandu: a rule that worked in one period can fail for years, costs eat small edges, and a market's structure - who trades, how much of each company floats, how prices are pushed - decides which rules can work at all.
What this means for you
- Don't chase recent winners on NEPSE just because they have risen - on this evidence, that has been the worst of the five rules.
- Quality is a better starting filter than cheapness alone: a cheap company that earns little often stays cheap. Our guide to bank stocks shows what to check.
- Costs matter. Trading every month on NEPSE costs real money; a rule needs a clear edge to survive it.
- Check before you trust a rule from abroad. What works in the US often does not transfer.
The full study
This post shows only the headline numbers. Inside the MacroLens NP desk, the factor research page shows each factor month by month, its worst fall, how reliably it ranked stocks, the five quintiles from best to worst, and today's top-ranked stocks for each factor and for all of them combined. Start your free 7-day trial, or sign in if you already have an account.
This is research on past prices and published results, not investment advice. Short histories can mislead, and past results do not guarantee future ones.
Source: MacroLens NP analysis of NEPSE prices and company results, June 2022 - September 2026. Chart: MacroLens NP. Cover photo: public domain.
