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.

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.

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.

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-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.

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