QMA wins "Best Factor Investing Paper 2019"
The underperformance of the "value" risk factor over the last couple of years has been a real concern for advocates of factor investing. Perhaps for this reason, the winning paper from QMA has struck a real chord with investors, with more than 3000 views since its publication in September. In the space of just 12 pages, the QMA authors present a variety of tables and charts which enable them to construct a persuasive argument.
QMA's paper focuses on the recent underperformance of Value vs Growth, and finds that such extreme periods of underperformance have only occurred twice in the last 30 years. They argue that investors should consider adding a value tilt to portfolios.
Robeco examines 24 global factor premiums across a variety of asset classes and using over 200 years of data. Focusing on a relatively small number of factors for each asset class, the new evidence shows that the large majority of these key, global factors are strongly present under conservative p-hacking considerations, with limited out-of-sample decay of the return premia.
AQR conducts a comprehensive study of factor timing, examining factor premia (value, carry, momentum, defensive) for six asset classes and over a century of return data.
This paper is not a primer on factors. Instead, Qontigo/Axioma discusses many different ways of constructing a long-short factor-mimicking portfolio, then analyzes the 'purity' of their exposures to a particular factor and the returns that are achieved. Portfolio construction choices related to the underlying investment universe, exposures to other factors, rebalancing frequency, and the ability to go short all materially affect the returns of a factor portfolio.
FTSE Russell surveyed 178 global institutional asset owners in the course of this survey, who between them represent over USD 5 trillion in assets under management. This report details their survey responses, as well as their attitudes towards smart beta and smart beta index-based strategies. Multi-factor strategies account for 71% of factor strategy adoptions by survey respondents.
Long-only factor strategies have exhibited poor performance from 2016-2019. To delve deeper into an analysis of these factor returns, Scientific Beta first describes the drivers of factor performance (exposure to the big six rewarded factors), diversification away from unrewarded idiosyncratic equity risk, and the management of systematic non-factor risks. Ultimately, they find that the last driver, systematic non-factor risks (mostly to do with the implementation of factor portfolios) is the reason for underperformance.
When constructing equity factor portfolios, one should not overlook non-style factors such as sectors, regions, size, and the market factor, as these can also influence equity returns. In fact, in order to properly analyze the performance of a style-factor-tilted portfolio, BNP Paribas Asset Management suggests holding equivalent non-style factor exposures to the benchmark index. The same holds true for style-factor-tilted corporate bond portfolios.
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