QMA wins Best Factor Investing Paper 2020
2020 has, until very recently, seen a continuation of the underperformance of the Value factor, which has piled additional angst onto its proponents as they continue to wait for a reappraisal of 'cheap' stocks. QMA's winning paper may offer a glimmer of hope, as with a new valuation-based analysis framework, they argue that a downward readjustment in the price of Growth stocks is a distinct possibility.
WINNING PAPER: QMA
This winning paper from QMA presents a new framework in which the authors relate valuation multiples to fundamentals. Using this framework and a valuation measure, they explore how changes in fundamental analysis and assumptions affect pricing across global equity markets. QMA finds that growth companies are much more sensitive to changes in certain fundamental valuation measures than value companies. Finally, they argue that a downward repricing of Growth stocks is probable, which is likely to spur a rotation back to Value as the natural outcome.
HIGHLY COMMENDED PAPERS
This paper from FTSE Russell outlines how to construct factor strategies using specific and controlled factor exposures. It illustrates why stock weightings may not be a great idea and suggests why one might want to consider using factor tilts for portfolios. The paper also shows how using factor inversion in a controlled manner in one's portfolio construction process may generate excess returns.
For compliance reasons, this paper is only accessible in certain geographies
This fifth Annual Global Factor Investing Study from Invesco reflects the views of 238 investors managing more than $25tn of assets. Investment intentions on topics relating to factor investing are explored including the use of passive investments to implement factor strategies, approaches to the introduction of ESG in factor models, and the use of factors in fixed income investing.
In this paper, Morgan Stanley IM’s Michael Mauboussin argues against the use of multiples as valuation techniques for companies. Using valuation multiples obscures the real drivers behind a company's value and may lead to confusion of how revisions to expectations might ultimately affect multiples.
Nuveen's paper focuses on the income-generating potential of alternative assets and the risk factors that drive returns in alternative assets. A suitable strategy needs to be planned, as some of the diversification benefits that alternative assets provide may be negated. Risk analysis is undertaken across several income-generating asset classes, and a framework for risk-based portfolio construction is also provided.
Wellington Management's paper draws upon their fundamental factor framework to help assess the structural challenges to value. They note how some managers are now adapting to what they perceive to be a 'new normal' investing environment. Wellington proposes an alternative, broader definition of value; one which incorporates a discounted cash flow-based metric that offers a more refined definition of what cheap currently means.
This paper by Research Affiliates argues for a mean reversion by value and growth stocks, given the levels of dispersion that existed for much of 2020. Referencing past recessions to help in determining potential outcomes, the authors suggest that regardless of the initial spur, when economic uncertainty is resolved, several styles of investing including value, small cap and quality have all performed well.
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