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 INTRODUCTION Alpha in finance is shrinking continuously as investors are getting

This research note was originally published at Alpha Architect. INTRODUCTION Mirror, mirror, on the wall – which is the fairest of them all? Recent commentary (to include a recent Barron’s article) seems to suggest that value is dead and may never come back. Of course, most of these comments

We recently published a research note on the relationship between factor returns and real GDP growth (Equity Factors & GDP Growth), which highlighted that some factors exhibit pro-cyclical while others have anti-cyclical characteristics. The Value and Size factors showed strong returns when

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 INTRODUCTION Tax

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 INTRODUCTION Low Volatility strategies have become popular

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 INTRODUCTION Assets under management in smart beta products surpassed $1 trillion in

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 INTRODUCTION We present the performance of seven well-known factors on an annual basis for the last 10 years and the

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 INTRODUCTION Factor investing has become immensely popular in recent years and assets in smart beta products

Some ETF investors claim that passive index products are superior to actively managed funds due to lower turnover and therefore less transaction costs. While this is partially true, most investors are unlikely to be familiar that indices such as the S&P 500 have a relatively high amount of

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 INTRODUCTION Financial commentators frequently explain a

According to MorningStar assets under management of smart beta products breached $1 trillion in 2017 and more than half of the assets were invested in just three factors: Value, Growth and Dividend Yield. Naturally there is a significant amount of empirical evidence that suggests Value stocks

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 INTRODUCTION Creating factor portfolios

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 INTRODUCTION In a recent research report we showed how investors can combine factors

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 INTRODUCTION 2018 started almost identical to 2017 in terms of factor

SUMMARY 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 INTRODUCTION Despite

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 INTRODUCTION Despite factor investing having gained immense popularity in recent years,

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

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 INTRODUCTION Reality is the murder of a beautiful theory by a gang of

FactorResearch publishes a white paper on building multi-factor models. SUMMARY 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

2017 was a positive year for most factors Quality, Growth and Momentum showed the strongest performance Value, Dividend Yield and Size generated negative returns INTRODUCTION We present the performance of seven well-known factors on an annual basis for the last 10 years and the full-year 2017. It is

An investment in knowledge pays the best interest. (Benjamin Franklin) December 2017. Reading Time: Several hours. Author: FactorResearch. SUMMARY Contains 34 research papers that we published on FactorResearch.com in 2017 Focus on factor investing and quantitative strategies from an investor’s

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 INTRODUCTION At this time

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 INTRODUCTION Investors and traders basically only have two options

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 INTRODUCTION Value is likely the most common strategy for equity fund managers as the principle of buying something at

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

The year 2017 might be regarded as the year where cryptocurrencies became mainstream. Investment funds focused on cryptocurrencies were launched, the CBOE announced Bitcoin futures for the end of the year and some everyday expenses like booking flights at Expedia can be paid in Bitcoins.

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 INTRODUCTION Hedge fund assets reached an

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 INTRODUCTION Year-to-date 2017 is shaping up as a

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 INTRODUCTION The search for yield has

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 INTRODUCTION Factor investing can be challenged in many ways. Nearly all of the

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 INTRODUCTION A

SUMMARY 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 INTRODUCTION According to Benjamin Franklin death and taxes are the only two certainties in life. In finance, where much

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 INTRODUCTION We present the performance of six well-known factors on an annual

SUMMARY 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 INTRODUCTION The concept of

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 INTRODUCTION In July we published a research report “Factors

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 INTRODUCTION The term “Factor Investing” reached an all-time high this year according to Google

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 INTRODUCTION The rise of ETFs is often associated with higher stock

SUMMARY 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 for Value & Momentum The combination portfolios show the highest risk-return profiles, albeit at lower returns

SUMMARY 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 INTRODUCTION In our recent research note “Smart Beta vs Factors in Portfolio Construction” we

SUMMARY 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 INTRODUCTION FTSE Russell’s 2017 Smart

SUMMARY 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 INTRODUCTION Blackrock, a provider of active and passive