Excess Returns, Ep. 27: Quality and Low Volatility: The Factors That Shouldn’t Work

Investing factors that work over time typically do so for one of two reasons: they either produce an excess return by taking on additional risk or they benefit from the tendency of investors to systematically misprice certain types of securities. Factors like value and momentum are easy to explain using this framework, but the outperformance of quality and low volatility offers more of a challenge. In this episode, we take an in depth look at… Read More

Rob Arnott Claims Victory on Factor Crowding

Research Affiliates Co-Founder Rob Arnott is feeling “redeemed” after the rotation earlier this month from growth to value outperformance, according to an article in Bloomberg that says, “it smacks of quantitative strategies growing in popularity so when the trend breaks, it breaks big.” In a phone interview with Bloomberg, Arnott said, “whether this is the start of a comeback for value is arguably the most important question here because value has underperformed now for 12… Read More

Six Common Misconceptions About Factor-Based Strategies

By Jack Forehand, CFA (@practicalquant) Factor strategies have grown exponentially in the past decade. Almost every major asset manager now offers their variation of things like value, momentum, quality, and low volatility, and each of them has their case as to why their approach is better than the others. But at their core, all these strategies rely on one basic principle – that if you invest using factors, you will earn an excess return over… Read More

Factor Investing is Falling Short

The attempts by pension funds and endowments to earn equity premiums by incorporating factor-based funds into their portfolios has fallen short, instead leaving them with uncompensated risks. This according to a recent article inInstitutional Investor. The article cites data from Northern Trust Asset Management’s (NTAM) analysis of 500 complex institutional portfolios over the past five years. The study found that “institutions weren’t getting the results they wanted,” for a number of reasons: ·      “Targeted factor exposures… Read More

Validea’s Justin Carbonneau on the Acquirer’s Multiple Podcast

Last week Validea Partner Justin Carbonneau was interviewed by Tobias Carlisle on the Acquirer’s Multiple Podcast. Toby and Justin discuss Validea and our approach to investing, as well as a bunch of other investing related topics. Below is an outline of the discussion and a link to the video. How Validea capture’s quantitative models and what we do with them; How we actually implement these strategies in the real world; The underperformance of value stocks,… Read More

Is GARP Investing Still Golden?

An article in CFA Institute discusses the methodology and performance of growth-at-a-reasonable-price (GARP) investing, a style popularized by Fidelity manager Peter Lynch. “Most investors,” the article says, “are inclined toward value, a preference backed by ample academic research.” But some try to bridge the value/growth gap through a hybrid, GARP strategy. It describes the methodology and an analysis of GARP stocks with respect to earnings growth and valuation: The article also offers a breakdown of… Read More

Five Questions: Factor Investing with Jim O’Shaughnessy

By Jack Forehand (@practicalquant) Factor investing has grown dramatically in recent years. But it is far from new. As those of us who invest using factors seek to learn more about them and the best way to utilize them in our portfolios, there is no better place to turn than those who have been there since the beginning. For this week’s interview, I have the privilege of talking to Jim O’Shaughnessy. Jim was a factor… Read More

Rob Arnott on Quant Investing: Opportunities and Pitfalls

In a podcast interview last month with the Investment Innovation Institute, Research Affiliate’s Rob Arnott discussed a range of issues related to factor investing, quant strategies and research with host Daniel Grioli. Here are some highlights: “There are no bargains in the absence of fear, and fear is usually rooted in a narrative of things that could go wrong,” says Arnott, adding that opportunities present themselves in stocks that are out-of-favor, unloved and have inflicted… Read More

Investors Getting More Comfortable with Factor Investing

An article in WealthManagement reports that factor investing has gained acceptance and an increase in demand, as evidenced by an Invesco study that involved interviews with key decision makers of more than 300 institutional and wholesale factor investors. “However,” the article continues, “the Invesco study highlighted that nearly half of the investors adopted factor investing for the first in 2015 or more recently.” The study also found that factor investing generally began with a single… Read More

Quant Investor Cliff Asness Defends Factor-Based Strategies

Prompted by a lackluster performance year, AQR Capital Management founder Cliff Asness wrote a 23-page essay defending his factor-based investing strategies according to a recent Bloomberg article that features an interview with the billionaire. Here are some highlights: Asness believes that there is a “minor crisis in confidence” for some quants, but that it’s misplaced. “We’ve seen periods like this quite a few times before.” He contends that his firm expects to “win long term,… Read More