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 the first 2 factors, value and quality. The value factor focuses on typical valuation ratios such as Price-to-Book (P/B), Price-to-Sales (P/S) and Price-to-Earnings (P/E). Quality, which always will be somewhat subjective, is determined using metrics like Return-on-Equity (ROE) and Return-on-Investment (ROI).
  • Value and quality are the first two factors we will introduce in a three-part series. The next article will focus on low-volatility, momentum and size. The final piece will explain how we construct a portfolio using these factors.
  • 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.

Introduction

This will be the first in a series of regular research notes commenting on the performance and general landscape for factor i...

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