Research Affiliates: Optimal Factor Investing Approach Includes Momentum

A new paper published by two executives at Research Affiliates says that the best-performing multi-factor portfolios include the momentum factor. This according to an article in Institutional Investor.

The article reports that the momentum factor has been criticized for having high trading costs that negatively impact returns, but the RA study’s analysis of different multi-factor portfolios found that the best balance between “effectively harvesting the factor premium and implementation costs” was in a portfolio that invested in “roughly a quarter of the investable universe based on six investment factors: value, low beta, profitability, investment, momentum and size.”

The study– conducted by the firm’s head of investment strategy Feifei Li and vice president for smart beta Joseph Shim– also found that adding momentum to a $10 billion portfolio reduced trading costs by a single basis point, despite the more frequent rebalancing required with momentum stocks.

“Because momentum is associated with more liquid stocks,” the paper notes, “the additional liquidity compensates for the increased turnover.”