Five Questions: Factor Timing with Nicolas Rabener

By Jack Forehand, CFA (@practicalquant) Factor timing is a pretty controversial topic in the quantitative investing world. On one hand, we are all taught that we should buy low and sell high, so it seems intuitive to add exposure to factors that are out of favor. But in reality, it isn’t that simple and factor timing is much more difficult than it would seem in theory. This issue has also divided some of the smartest… Read More

Factor Investing’s Brutal Truth

A new study published in the financial Analysts Journal argues that although asset managers can generate more returns by using market timing factors than they can with passive strategies, associated costs eat outweigh the benefits. This according to an article in Institutional Investor. The findings give investors cause to be “cautious about dynamic equity factor allocation compared with the simpler strategy of constructing a passive multi-factor portfolio,” the article reports. The study found that a… Read More

Why Use One Value Factor When You Can Use Many

By Justin Carbonneau (@jjcarbonneau)—-Interested in chatting with Justin – let him know.—- Suppose you wanted to find the value stocks in today’s market using common value ratios. Which would you use and why? Would you lean more heavily on the price-to-book ratio, which is largely used in academic testing and originates out of the world of Graham & Dodd? Or would you rather use something like the price-to-earnings ratio, which is more common and uses… Read More

Hulbert: A New Approach to Momentum Investing

New research has shown that a more effective way to profit from the momentum effect is to buy the “hottest” factors rather than the best-performing stocks. This according to a Wall Street Journal article by Mark Hulbert, founder of Hulbert Financial Digest. Researchers found that stocks held in a high-momentum portfolio tend to share the same “factors” and that the “real momentum effect actually takes place at the level of these factors rather than individual… Read More

Should CAPM Be Retired?

A new paper argues that factor investing challenges the decades-old Capital Asset Pricing Model (CAPM), according to an article in Institutional Investor. The paper’s co-author, Northern Trust Asset Management’s head of quantitative strategies Michael Hunstad, said in an interview: “CAPM asserts that if you want more return you take more risk. But also in the same vein, nothing generates a higher risk-adjusted return than a market-cap portfolio, typically thought of as a market cap-weighted benchmark.”… Read More

A Better Use of Data in Emerging Market Investing

An article in Barron’s discusses how factor investing hasn’t taken on in emerging markets as much as in other asset classes, adding that “investors shouldn’t overlook the opportunities.” The article cites Morningstar data showing that ETFs are more heavily invested in developed countries than in emerging ones, but highlights research conducted last year by the Dutch asset-management firm Robeco showing that a portfolio favoring value and momentum stocks within the MSCI Emerging Markets Index generated… Read More

Factor Returns and Trading Costs

A recent article in Advisor Perspectives by BAM Alliance’s Larry Swedroe offers a list of criteria investors should consider when choosing a factor-based strategy. According to the article, “The factor must show evidence of being a unique/independent source of risk that has generated a premium that is:” Persistent across time and economic regimes; Pervasive across geographic areas, sectors and asset classes; Robust in that it holds across various metrics; Investable in that it works not… Read More

Investors: Consider revenue-weighted ETFs

An article in CityWire suggests that investors should “forget the switch from active to passive” and consider investing in revenue-weighted indices. Citing Schroders research, the article reports that over the past five years, about 60% of funds flowing into US equity ETFs has gone to alternative equity index strategies rather than those based on market capitalization, but the returns have been largely disappointing. Instead, it suggests that revenue-weighted ETFs might be a better choice. “Revenue… Read More

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