Research Affiliates Analysis Shows Weak Factors

A recent paper based on analysis by Research Affiliates shows that once research data is analyzed outside the original sample period, about half the factors were “not robust,” according to an article co-authored by RA partner Juhani Linnainmaa, Ph.D. “Our motivation was the belief that some of the many factors identified have been data mined,” Linnainmaa said in an interview, explaining that researchers analyzing large databases collectively have an incentive to find a factor that… Read More

Five More Questions: Factor Investing with Jim O’Shaughnessy

By Jack Forehand, CFA (@practicalquant) This is Part II of my interview with Jim O’Shaughnessy. If you missed Part I, you can find it here. In part II, we talk about trend following, the future for simple value investing, and we take in in depth look at some of the arguments others have made in favor of the death of value investing. Just a note before we begin. This interview was transcribed from a phone… Read More

Five Questions: An Academic Look at Factors with Lu Zhang

By Jack Forehand (@practicalquant) — One of the major challenges that the finance community has faced over the years is how to explain what drives stock returns over time. If the market is efficient, then the only way to generate excess returns is to take more risk. But risk only makes sense to take if you get compensated for it. Determining which risks receive that compensation has been the subject of significant research in the… Read More

Five Questions: A Wealth Manager’s View of Factors with Michael Batnick

By Jack Forehand (@practicalquant) — Factor Investing poses some interesting challenges for wealth managers. On one hand, the evidence is very strong that investing using factors produces superior to returns to market cap weighted indexes over the long-term. On the other, factor strategies introduce another set of behavioral problems for clients because the extended periods of underperformance that are common in factor investing can lead to bad decision making and underperformance relative to index funds… Read More

Value Investing: Has it Gone Out of Style?

An article on the WisdomTree blog reports that the decade ending September 2018 was the “single worst decade in history” for price-book as a factor-sort of the market and asks, “Is value dead? Or do enthusiasts of the Russell Index family and the Fama-French Factor Model need to re-evaluate price-to-book ratio (P/B) as the primary metric used in defining value stocks?” The article cites comments by Fama-French in their seminal paper on factors: “there is… Read More

The O’Shaughnessy Approach: Guarding Against Narrative-Loving Humans

An article in CityWire profiles the father-and-son investing duo of Jim and Patrick O’Shaughnessy, chief investment officer and chief executive respectively at quantitative money management firm O’Shaughnessy Asset Management. Jim O’Shaughnessy, who began his career in quantitative investing in 1987 and has authored four best-selling books on finance, explains, “We want to find as much empirical evidence that supports certain ways of selecting securities and – equally importantly – of ignoring securities that would fail… Read More

Alignment of Investing Styles Not Necessarily Bad Omen

An article by Bloomberg columnist Nir Kaissar argues that the occasional correlation of investment styles or factors—citing value and momentum as examples—isn’t a good predictor of a downturn. The article cites a range of data that tracks the performance of factor investing styles over time: “So,” writes Kaissar, “it’s not necessarily true that factors uniformly disappoint during downturns. Nor is it true that rising factor correlations have augured market stress.” He notes that such a… Read More

Swedroe on Factors in Emerging Market Stocks

In a recent article for ETF.com, BAM Alliance director of research Larry Swedroe outlines findings of an August 2018 study on factor-based investing titled, “The Cross-Section of Equity Returns in Emerging Markets.” Among the many findings of the study–which covers 27 emerging market countries for the period between 1988 and 2014—here are some highlights: Size, value and momentum anomalies are statistically significant using value-weighted portfolios; After controlling for company size, the book-to-market ratio and momentum… Read More

Considerations in Momentum Investing

By Justin J. Carbonneau (@jjcarbonneau) —  About a week ago CNBC had a piece that broke down how much the largest, best performing stocks have contributed to the overall market’s rise this year as tracked by the S&P 500. The table below shows that 99% of the market return in 2018 can get boiled down to a handle of tech darlings — Amazon, Netflix, Microsoft, Apple, Alphabet (Google) and Facebook. The average return of all… Read More

Research Affiliates Says Spread Factor Bets

At the 30th annual Morningstar Investor Conference held last month, passive strategist Adam McCullough interviewed Feifei Lee, director and global head of Research Affiliates Investment Management Group about her firm’s multifactor investment strategy. Here are some highlights: According to Lee, Research Affiliates offers investors a multifactor strategy that combines individual factor portfolios while remaining transparent with respect to which factors are under- or out-performing. The strategy employs five factors; value, momentum, low risk, quality and… Read More