RESEARCH: MULTI-FACTOR MODELS

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

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

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

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

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

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

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

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