The “Value” Phoenix May Rise

A recent Advisor Perspectives article argues that the value investing strategy shouldn’t be counted out just yet. “We have seen flickers of value’s reemergence,” it reports, adding, “After outperforming momentum by roughly 6% in September 2019, value has staged another noteworthy rally, outperforming momentum by over 2.5% in just one week. The real question is: when will the value rally stick?” The article cites the following key points: Factors are cyclical: While some contend that… Read More

Quants Find the Missing Piece

New research has found that the implementation methods related to some factor-based investing strategies is the culprit for underperformance, and that “a simple formula can solve it.” This according to an article in Institutional Investor. The study reportedly analyzed the best way to combine investment factors like value and momentum and found that a portfolio constructed using “forecast risk management”—a formula that “determines the weights of an optimal multi-factor portfolio with risk management”—could generate “significant… Read More

A Detailed Look at the Quality Factor

By Jack Forehand, CFA There is probably no investing factor that makes more sense to your average investor than quality. We all want to own great companies – think Apple, Microsoft, Google, JP Morgan. We love to invest in companies that consistently compound their earnings over time. And owning high quality, brand name businesses certainly makes you sound smarter at cocktail parties than owning cheap value stocks that many people think will never bounce back. It… Read More

Excess Returns, Ep. 14: Some Thoughts on the Struggles of Factor Investing in the Past Decade

The long-term evidence to support factor investing is compelling. Academic work has shown that factors like value and momentum have produced an excess return relative to the market over time. But what occurred in the most recent decade was in many ways the opposite of what has happened over the long-term. Almost anything an investor did to get away from buying large growth companies over that period was a detraction from returns. In this episode,… Read More

Some Thoughts on the Struggles of Factor Investing in the Past Decade

By Jack Forehand, CFA (@practicalquant)The long-term evidence to support factor investing is compelling. Academic work has shown that factors like value and momentum have produced an excess return relative to the market over time. Whether the explanation of that excess return is risk or behavior–based, or a combination of both, is the subject of significant debate, but there is little doubt that there have been premiums associated with factors over the long-term. But what occurred… Read More

Morningstar Study: Which Investment Factors Work?

A recent article in Morningstar outlines results of a study the firm conducted on seven investment factors showing that volatility, size and momentum worked best. The article provides the following chart, which depicts each factor’s excess return on a cumulative basis (over 16 years): The article suggests focusing on the patterns illustrated: “The excess-return totals aren’t particularly meaningful,” it says, “because these factors cannot be purchased. They come attached to stocks, which in turn offer… Read More

Dimensional Changes investment Process

After years of research, quant investing pioneer Dimensional Fund Advisors added a new source of return to its investment process, according to a recent article in Institutional Investor. “Dimensional is adding a new factor based on the behavior of companies with high levels of investment.” The firm’s head of research, Savina Rizova and co-author Namiko Saito published new research that examined the behavior of stocks with high investment—as measured by asset growth—and “whether it could… Read More

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