Be sure to check out Part 1 and Part 2 to familiarize yourself with the Five Factors

Key Takeaways:

  • Our Factor Investing Model will be based on 5 common factors (value, quality, low volatility, momentum and size). During 3Q 2021, momentum did well while the other factors were flat to down. Over the past year, the size premium (small-cap stocks over large-cap stocks) led the way.
  • In this report, we will be covering how to construct a baseline factor portfolio based on the five factors we have introduced in Part 1 and Part 2 of this series.
  • We introduced the value and quality factors in the first part of this three-part series. In Part II we introduced low volatility, momentum, and size.
  • Static factor portfolios have struggled over the past 18 months, and have not contributed consistent positive return since about 2013.
  • A simple factor timing overlay, however, has performed better, particularly during the recent downturns in the value and low-volatility factors.

Multi-Factor Portfolios

Constructing a Baseline Factor Portfolio

One of the benefits of factor investing is that the factors themselves are not perfectly correlated. From Fig. 1, we see that some pairs of factors exhibit high correlations (particularly low-volatility and quality), while value and mom...

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