RESEARCH

The objective of these research reports is to analyse factor investing and quantitative strategies from a practical perspective and highlight issues that may not be significant for more rigid academic papers. They are kept brief, as simple as possible, and will hopefully stimulate debate.

Factors are defined in line with academic and industry standards. Please see our Factor Guide for factor definitions and portfolio construction.

Please see all our research notes below or click on the Research Map for quick access to specific topics.

Click me!

IMPROVING THE ODDS OF VALUE

  • Value investors earn a premium for holding undesirable stocks
  • Market skewness may identify periods where the premium is more attractive
  • The returns from the Value factor since 1926 were zero when market skewness was negative

October 2018. Reading Time: 10 Minutes.

FACTOR INVESTING IN MICRO & SMALL CAPS

  • Micro caps are commonly perceived as highly risky, but potentially also highly rewarding
  • Smalls caps generate more attractive risk-return ratios than micro caps on index level
  • Focusing on factors improves risk-adjusted returns across market cap segments

October 2018. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2018

  • Global factor performance in the first three quarters of 2018 is comparable to 2017
  • However, regional factor performance diverges, reflecting changes in monetary and trade policies
  • Low Volatility leads and Value lags

October 2018. Reading Time: 10 Minutes.

LIQUID ALTERNATIVES: ALTERNATIVE ENOUGH?

  • Liquid alternatives offer hedge fund strategies in mutual fund format
  • The correlations to the S&P 500 have been high, even of market neutral funds
  • Diversification benefits have therefore been limited

September 2018. Reading Time: 10 Minutes.

SHORT-TERM MOMENTUM IN EQUITY FACTORS

  • Short-term momentum persists in common equity factors
  • The persistence is strong in Value and Dividend Yield
  • However, these results conflict with short-term mean-reversion on equity index level

September 2018. Reading Time: 10 Minutes.

VOLATILITY, DISPERSION & CORRELATION – FRIENDS OR FOES?

  • Higher volatility & dispersion imply higher stock market risks
  • The relationship between correlation and risk is not linear
  • However, these market technicals do not behave consistently across time

September 2018. Reading Time: 10 Minutes.

CHASING MUTUAL FUND PERFORMANCE

  • Mutual funds exhibit momentum when measured by their one-year performance
  • Momentum disappears when more reasonable fund selection criteria are applied
  • Performance does not seem effective for fund selection for a full market cycle

September 2018. Reading Time: 10 Minutes.

FACTOR MOMENTUM

  • The Momentum strategy can be applied to stocks, sectors, countries and factors
  • Factor momentum shows positive excess returns across regions
  • However, single-stock Momentum performance is comparable and less complex to implement

August 2018. Reading Time: 10 Minutes.

HOW CROWDED ARE TECH STOCKS?

  • Equity crowding models can be applied to factors and sectors
  • Crowding leads to more frequent drawdowns
  • Tech sector was crowded over the last 12 months

August 2018. Reading Time: 10 Minutes.

LOW VOLATILITY, LOW BETA & LOW CORRELATION

  • The Low Volatility, Low Beta and Low Correlation factors are interrelated
  • Low-risk factors generate attractive risk-adjusted returns, but require beta-neutrality
  • Currently they feature moderate to high interest-rate sensitivity

August 2018. Reading Time: 10 Minutes.

FACTOR EXPOSURE: SMART BETA ETFS VS MUTUAL FUNDS

  • Investors can express factor views via smart beta ETFs or mutual funds
  • Some mutual funds offer higher factor exposure than smart beta ETFs
  • Given higher fees, strong views on expected factor performance are required

August 2018. Reading Time: 10 Minutes.

MOMENTUM VARIATIONS

  • The simplicity of the Momentum factor can be intellectually challenging
  • Various alternative Momentum versions highlight remarkable similar return profiles
  • The robustness is an attractive characteristic of the investment strategy

August 2018. Reading Time: 10 Minutes.

FACTORS: SHORTING STOCKS VS THE INDEX 

  • Most factor investing research is based on long-short stock portfolios
  • Investible risk premia strategies often feature a short index position
  • Trade-off between theoretical alpha and implementation costs & efficiency

July 2018. Reading Time: 10 Minutes.

ETFS, SMART BETA & FACTOR EXPOSURE

  • Factor exposure analysis can be used to derive factor themes
  • Smart beta ETFs offer relatively low factor exposure
  • It is all about how factors are defined

July 2018. Reading Time: 10 Minutes.

STOCK PORTFOLIO OPTIMISATION

  • Portfolios frequently contain stocks representing duplicate factor risks or insignificant weights
  • An optimisation process focused on factor exposure can increase the portfolio efficiency
  • Increasing or decreasing factor exposure requires a view on expected factor performance and risks

July 2018. Reading Time: 10 Minutes.

IMPACT OF SINGLE STOCKS ON FACTOR RETURNS

  • Factor portfolios are typically created by equal weighting stocks
  • The impact of single stocks is therefore reduced compared to market-cap weighted indices
  • The FAANG stocks impacted factors differently

July 2018. Reading Time: 10 Minutes.

WHITE PAPER: FACTOR CROWDING MODEL

  • Crowded factors exhibit higher drawdowns than uncrowded factors
  • A multi-metric approach can be successfully applied to measure factor crowding
  • Effective in reducing factor drawdowns and volatility, but less meaningful for returns

July 2018. Reading Time: 15 Minutes.

FACTOR OLYMPICS 1H 2018

  • Factor performance in 1H 2018 is comparable to 2017
  • The Size factor has taken the lead, likely reflecting the threat of global trade wars
  • Value has generated the most negative returns across regions

July 2018. Reading Time: 10 Minutes.

FACTOR CROWDING VIA VALUATIONS

  • Fundamental factor valuations can be used to identify factor crowding
  • However, the approach does not improve risk metrics
  • A multi-metric approach for identifying factor crowding is likely more successful

June 2018. Reading Time: 10 Minutes.

SECTOR VERSUS COUNTRY MOMENTUM

  • The Momentum strategy can be applied to stocks, sectors and countries
  • Sector and country Momentum portfolios generate positive excess returns
  • However, cross sector & country and single stock Momentum portfolios generate higher risk-return ratios

June 2018. Reading Time: 10 Minutes.

SKEWNESS AS A FACTOR

  • Skewness is a feature of stocks with high firm-risks
  • Stocks with positive or negative skewness outperform the market
  • Can partially be explained by the Size factor

June 2018. Reading Time: 10 Minutes.

MARKET TIMING WITH MULTIPLES, MOMENTUM & VOLATILITY

  • Equity multiples have been elevated in recent years
  • Using valuation multiples for allocation decisions is a challenging strategy
  • Momentum and volatility-based strategies are more attractive

June 2018. Reading Time: 10 Minutes.

TACTICAL MEAN-REVERSION

  • The Mean-Reversion factor is driven by volatility
  • Allocating tactically when volatility is high generates an attractive payoff profile
  • The strategy can be considered as a tail risk hedge for equity portfolios

May 2018. Reading Time: 10 Minutes.

MEAN-REVERSION ACROSS MARKETS

  • The Mean-Reversion factor shows the same trends across markets
  • The strategy differentiates itself from other factors by exhibiting strong positive skewness
  • Mean-Reversion is an attractive diversifier for an equity-centric portfolio

May 2018. Reading Time: 10 Minutes.

ALPHA MOMENTUM

  • Stocks can be ranked by alpha instead of stock returns
  • Alpha Momentum generates a higher and more consistent performance than Price Momentum
  • Momentum crashes are reduced significantly and risk-return ratios increase

May 2018. Reading Time: 10 Minutes.

VALUE FACTOR: COMPARISON OF VALUATION METRICS

  • Price-to-book is not an effective valuation metric
  • There is not one valuation metric that is superior across markets
  • Combining multiple metrics generates the highest risk-adjusted returns

May 2018. Reading Time: 10 Minutes.

EQUITY FACTORS & INFLATION

  • Factor performance is impacted by inflation and deflation
  • An inflationary environment is more attractive for most factors
  • The change in inflation has been most meaningful for the Size factor

April 2018. Reading Time: 10 Minutes.

VALUE FACTOR: IMPROVING THE TAX EFFICIENCY

  • The tax efficiency of the Value factor can be improved by reducing exposure to dividend-yielding stocks
  • Improving the tax efficiency reduces the performance in Europe and Japan, but not in the US
  • Reducing turnover can be considered for minimising capital gains and stamp duty taxes

April 2018. Reading Time: 10 Minutes.

LOW VOLATILITY FACTOR: INTEREST RATE-SENSITIVITY & SECTOR-NEUTRALITY

  • The interest rate-sensitivity of the Low Volatility factor has increased in recent years
  • Mainly due to the sectoral biases from the long portfolio
  • Sector-neutrality reduces the interest rate-sensitivity, albeit at the cost of performance

April 2018. Reading Time: 10 Minutes.

SMART BETA OR SMART MARKETING?

  • Smart beta ETF investors seem to ignore empirical evidence
  • Excess returns from smart beta are substantially different from factor returns
  • Smart beta ETFs offer little diversification for an equity-centric portfolio

April 2018. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q1 2018

  • 2018 started negative for the majority of factors
  • Momentum, Quality and Growth showed the strongest performance
  • Low Volatility, Dividend Yield and Value generated negative returns

April 2018. Reading Time: 10 Minutes.

FACTOR EXPOSURE ANALYSIS: DOW JONES

  • Factor exposure should be considered a source of returns as well as of risk
  • Factor biases can be measured top-down or bottom-up
  • The results of the two approaches do not necessarily reconcile

March 2018. Reading Time: 10 Minutes.

FACTOR PORTFOLIOS: TURNOVER ANALYSIS

  • Factor portfolios have an annual turnover over more than 100%
  • The turnover rate varies substantially across factors
  • Decreasing the rebalancing frequency reduces turnover, but also risk-return ratios

March 2018. Reading Time: 10 Minutes.

EQUITY FACTORS & GDP GROWTH

  • Economic cycles have a clear impact on factor performance
  • Some factors show pro-cyclical while others highlight anti-cyclical characteristics
  • Given that real GDP is not published in real-time, it is unlikely effective for factor selection

March 2018. Reading Time: 10 Minutes.

DIVIDEND YIELD COMBINATIONS

  • Buying high yielding and selling low yielding stocks is not an attractive strategy
  • Combining Dividend Yield with Quality & Growth factors improves the performance
  • Interestingly Dividend Growth adds relatively little value

March 2018. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: PORTFOLIO REBALANCING

  • Factor portfolios do not benefit significantly from intra-month rebalancing
  • However, too infrequent rebalancing leads to lower risk-return ratios
  • The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing

February 2018. Reading Time: 10 Minutes.

SEQUENTIAL MODEL: SORTING BY 5 FACTORS

  • The sequential model ranks stocks by factors sequentially
  • Allows investors to prioritise factors and results in concentrated portfolios
  • However, the factor sequence matters and only a few factors can be considered

February 2018. Reading Time: 10 Minutes.

VALUE FACTOR: INTRA VS CROSS-SECTOR

  • Intra versus cross-sector Value portfolios share the major trends
  • Neutralising the sector exposure increases the risk-return ratio of the Value factor
  • However, the benefits are marginal and come with higher operational complexity

February 2018. Reading Time: 10 Minutes.

WHAT’S IN A FACTOR? BREAKDOWN BY SECTORS

  • Some factors show structural sector exposure while others rotate sectors frequently
  • Sector concentrations explain factor performance and may represent concentration risks
  • Value is currently long Financials, Low Volatility is short Health Care, and Growth is short Energy

February 2018. Reading Time: 10 Minutes.

FACTOR ETFS & FUTURES

  • Investors can directly access factor returns via ETFs in the US & futures in Europe
  • However, neither of these come without some investor concerns
  • Realised returns differ substantially from theoretical returns

February 2018. Reading Time: 10 Minutes.

WHITE PAPER: FACTOR ALLOCATION MODELS

  • Factor timing and factor risk management are related concepts, but have different objectives
  • Factors have unique characteristics that require a tailored risk management approach
  • A multi-dimensional factor risk management model shows consistent increases in risk-return ratios and decreases in maximum drawdowns across markets

January 2018. Reading Time: 15 Minutes.

VALUE & MOMENTUM FACTOR PORTFOLIOS

  • Value and Momentum compliment each other given a low or negative correlation
  • Investors have different options for combining these two factors
  • The multi-factor model selection will be determined by investor preferences

January 2018. Reading Time: 10 Minutes.

FACTOR INVESTING: GROSS TO NET RETURNS

  • Long-short multi-factor portfolios generate attractive returns before fees
  • Returns are much less attractive post fees charged historically
  • However, some fees in the long-short space are likely justified given higher complexity

January 2018. Reading Time: 10 Minutes.

WHITE PAPER: MULTI-FACTOR MODELS 101

  • Three common approaches for creating multi-factor portfolios are the Combination, the Intersectional and the Sequential models
  • The results from the Combination and Intersectional models are comparable in terms of trend
  • Each model has its own advantages and disadvantages, the selection will depend on investor preferences

January 2018. Reading Time: 15 Minutes.

RESEARCH COMPENDIUM 2017

  • Contains 34 research papers that we published on FactorResearch.com in 2017
  • Focus on factor investing and quantitative strategies from an investor’s perspective
  • They are kept brief, as simple as possible, and will hopefully stimulate debate

December 2017. Reading Time: Several hours.

FACTOR OLYMPICS 2017

  • 2017 was a positive year for most factors
  • Quality, Growth and Momentum showed the strongest performance
  • Value, Dividend Yield and Size generated negative returns

January 2018. Reading Time: 10 Minutes.

FACTOR-RETURNS: YEAR-END CALENDAR EFFECTS

  • Value & Size generate abnormally large positive returns in January, Momentum negative returns
  • Abnormal returns are limited to the last week of December and first week of January
  • Difficult to harvest these returns efficiently due to illiquidity of markets at these times

December 2017. Reading Time: 10 Minutes.

MEAN-REVERSION ON EQUITY INDEX LEVEL

  • Mean-Reversion on index level became profitable post the 1970s, before that Momentum dominated
  • The structural shift from Momentum to Mean-Reversion is consistent across markets
  • Likely explained by the evolution of financial markets

December 2017. Reading Time: 10 Minutes.

INTERSECTIONAL MODEL: SORTING BY 7 FACTORS

  • Focusing purely on Value is a difficult strategy
  • Sorting by multiple factors improves performance and risk-metrics
  • However, factor selection and allocation remain challenging topics

December 2017. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: PORTFOLIO SCENARIOS

  • Most researchers create factor portfolios by taking the top & bottom 30% of stocks, which results in large portfolios
  • Portfolios can be reduced, but firm risks start influencing factor returns with too few stocks
  • Most investors are likely better of buying factor products then building factor portfolios themselves

November 2017. Reading Time: 10 Minutes.

QUANT STRATEGIES IN THE CRYPTOCURRENCY SPACE

  • Cryptocurrencies have reached a market capitalisation of > $150 billion
  • Backtesting quantitative strategies is difficult given a limited trading history & universe
  • Short-term Momentum works very well, classic factor investing strategies less so

November 2017. Reading Time: 10 Minutes.

HEDGE FUND FACTOR EXPOSURE & ALTERNATIVES

  • Equity hedge fund returns have been disappointing over the last 14 years
  • An exposure analysis shows no structural factor exposure, but frequent factor rotation
  • Multi-factor long-short products are an interesting alternative, depending on the fee level

November 2017. Reading Time: 10 Minutes.

INTEGRATED VALUE, GROWTH, & QUALITY PORTFOLIOS

  • Integrated Value, Growth & Quality portfolios generated attractive returns year-to-date 2017
  • Sorting stocks on several characteristics results in relatively smooth performance
  • Mitigates the issue of factor timing, but not of factor selection

November 2017. Reading Time: 10 Minutes.

RESIST THE SIREN CALL OF HIGH DIVIDENDS

  • Buying high yielding and selling low yielding stocks has been an attractive strategy since 2000
  • However, it has been a highly unattractive strategy over the last century
  • Investors should resist the Siren call of high yielding stocks and focus on other factors

October 2017. Reading Time: 10 Minutes.

FACTOR RETURNS: SMALL VS LARGE CAPS

  • A frequent criticism of factor investing is that factor returns are stronger in small caps
  • Our research highlights that this is not uniformly true across factors
  • Value and Size benefit most from including small caps

October 2017. Reading Time: 10 Minutes.

HEDGING MARKET CRASHES WITH FACTOR EXPOSURE

  • None of the factors consistently generated positive performance during recent market crashes
  • However, almost any factor exposure would have increased the risk-return ratio of an equity-centric portfolio
  • Low Volatility and Mean-Reversion would have been most beneficial, Momentum least

October 2017. Reading Time: 10 Minutes.

DEATH, TAXES, AND MEAN-REVERSION?

  • Mean-reversion has not performed well over the last few years
  • Highly sensitive to model assumptions
  • The strategy is an attractive addition for an equity-centric portfolio

October 2017. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2017

  • 2017 is on track for a good year for factor exposure as most factors are positive
  • Quality, Growth, and Momentum are headed for the winners podium
  • Value is negative across regions, giving up all of last year’s gains

October 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: ZERO ALPHA FOR MOST INVESTORS?

  • It’s difficult to rationalise why there should be excess returns from high quality stocks
  • The Quality factor needs to be constructed beta-neutral to achieve positive returns
  • Exposure to the Quality factor is an attractive hedge for an equity-centric portfolio

September 2017. Reading Time: 10 Minutes.

FACTOR ALLOCATION 101: EQUAL VS VOLATILITY-WEIGHTED

  • Equal-weight and volatility-weighted allocations are two common factor allocation frameworks
  • Risk-return ratios are not higher with volatility-weighted allocations
  • Different reasons can explain the superiority of equal-weight allocations

September 2017. Reading Time: 10 Minutes.

THERE IS VALUE IN THE VALUE FACTOR

  • Equity factors can be valued using fundamental metrics
  • Value and Size are cheap while Low Volatility and Growth are expensive
  • Likely more meaningful for medium- to long-term than short-term investors

September 2017. Reading Time: 10 Minutes.

FACTORS: CORRELATION CHECK

  • Correlations between Quality and Growth factors are currently elevated
  • Value is more negatively correlated than usual to Quality, Growth and Low Volatility
  • Monitoring correlations is important for maximising diversification benefits

September 2017. Reading Time: 10 Minutes.

VALUE + QUALITY OR HIGH QUALITY VALUE STOCKS?

  • Investors can either combine single-factors into a portfolio or sort stocks for several factor characteristics
  • Double-sorting seems to work better for Value & Quality than Value & Momentum
  • The combination portfolios show the highest risk-return profiles, albeit at lower returns

September 2017. Reading Time: 10 Minutes.

SMART BETA & FACTOR CORRELATIONS TO THE S&P 500

  • Most smart beta products exhibit correlations of > 0.9 to the S&P 500
  • Factors show correlations of zero on average
  • However, factor correlations are highly volatile across the market cycle

August 2017. Reading Time: 10 Minutes.

SMART BETA VS FACTORS IN PORTFOLIO CONSTRUCTION

  • Investors seek smart beta products for risk reduction
  • However, smart beta products are effectively long-only products with full equity risk
  • Only factor products, i.e. long-short portfolios, offer true diversification benefits and downside protection

August 2017. Reading Time: 10 Minutes.

SMART BETA VS FACTOR RETURNS

  • Smart beta ETFs are based on factor investing research
  • Excess returns from smart beta ETFs are different from factor returns
  • Investors need to be aware that smart beta ETFs offer little diversification for an equity-centric portfolio

August 2017. Reading Time: 10 Minutes.

EQUITY FACTORS IN JAPAN

  • Japan has unique characteristics from an economic perspective
  • Factor performance in Japan mirrors global factor performance
  • Debt & demographics seem to matter less than underlying factor drivers

August 2017. Reading Time: 10 Minutes.

FACTORS & VOLATILITY-BASED RISK MANAGEMENT 

  • A common approach to factor allocation is to scale exposure by factor volatility
  • This approach improves the risk-return ratios of Momentum, but lowers them for Value and Size
  • Factors have different underlying drivers, which require different risk management systems

July 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: HOW TO DEFINE IT? 

  • Different Quality definitions result in dramatically different return profiles
  • Questionable if there is structural alpha in the Quality factor
  • Investors would not have benefited significantly from exposure to Quality in the GFC

July 2017. Reading Time: 10 Minutes.

LOW VOLATILITY FACTOR: HIGH VALUATION 

  • The Low Volatility factor has generated stellar abnormal returns over the last decades
  • Current factor valuations are expensive compared to historical valuations
  • Factor volatility is at record lows and will likely surprise investors going forward

July 2017. Reading Time: 10 Minutes.

FACTORS & INTEREST RATES

  • There are no consistent relationships between Value, Size, Momentum and interest rates
  • Applies to high and low and increasing and decreasing rate environments
  • Investors shouldn’t be too concerned about factor exposure and rising rates, more about very low rates

July 2017. Reading Time: 10 Minutes.

FACTOR OLYMPICS: 1H 2017

  • 2017 seems to be a good year for factor exposure as most factors are positive
  • Growth, Quality, and Low Volatility are headed for the winners podium
  • Value is negative across regions

July 2017. Reading Time: 10 Minutes.

MOMENTUM FACTOR: INTRA VS CROSS-SECTOR 

  • Intra vs cross-sector Momentum factor profiles look remarkable similar
  • Momentum is like a force that permeates sectors and countries
  • Sector analysts need to pay attention to cross-sector Momentum

June 2017. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: BETA VS $-NEUTRALITY 

  • Factors constructed $-neutral didn’t benefit much from beta-exposure from 2000 to 2017
  • Beta-neutrality is only a must for Low Volatility
  • However, beta-neutral factors offer lower correlation to long-only indices

June 2017. Reading Time: 10 Minutes.

MARKET & FACTOR VOLATILITY 

  • Factor volatility mirrors market volatility
  • Market volatility is higher than factor volatility
  • Momentum has a higher volatility than Value or Size

June 2017. Reading Time: 10 Minutes.

VALUE & QUALITY FACTOR VALUATIONS 

  • Value and Quality stocks are typically polar opposites from a valuation perspective
  • The Value factor can be considered cheap across developed markets
  • The Quality factor is cheap in some and expensive in other markets

June 2017. Reading Time: 10 Minutes.

VALUE US SECTORAL ANALYSIS

  • Using price-to-book (PB) or price-to-earnings (PE) results in similar Value factor performance
  • Some sectors are perpetually expensive while others are always cheap
  • Sector rotation is higher with PE than with PB

May 2017. Reading Time: 10 Minutes.

MARKET TIMING VS RISK MANAGEMENT

  • Behavioural biases cause the average human to make sub-optimal investment decisions
  • Market timing should not be attempted
  • Simple and robust risk management systems may help overcome some of our issues

May 2017. Reading Time: 10 Minutes.

SIZE FACTOR

  • Size as a factor shows little consistency in generating positive returns over time
  • Investors do not seem to get compensated for the higher risks of holding small caps
  • If small cap exposure is still desired, best to implement via a small cap ETF

May 2017. Reading Time: 10 Minutes.

FACTORS & BEHAVIOURAL BIASES

  • Investors are humans and not the homo economicus
  • Investing is influenced by a wide variety of behavioural biases
  • Factors can be explained by a single or multiple biases

May 2017. Reading Time: 10 Minutes.

Join Others and Subscribe to our Research

You have Successfully Subscribed!

Share This