RESEARCH: FOR CURIOUS MINDS

CAN VALUE INVESTORS DO GOOD?

• ESG factors underperformed the Value factor and market since 2009
• Integrating ESG in Value investing decreased returns, but increased risk-return ratios
• Residual ESG factors are likely to generate negative returns given the focus on stakeholders, not shareholders

ESG INVESTING: TOO GOOD TO BE TRUE?

• ESG factors generated positive excess returns since 2009
• Show positive exposure to Low Volatility & Quality and negative exposure to Value & Size
• Factor exposure is likely structural and not temporary

PRIVATE EQUITY: THE EMPEROR HAS NO CLOTHES

• Private equity returns can be replicated with small cap equities
• Small, cheap and levered stocks would have achieved higher returns since 1988
• Valuation and debt multiples are at all-time-highs, lowering expected returns

THE RISE OF ZOMBIE STOCKS

• Zombie firms, where interest payments exceed operating profits, are on the rise
• Zombie stocks perform surprisingly well
• They are expensive, volatile stocks from diverse sectors

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

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

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

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

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

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

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

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