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This paper* compares classic and new smart-beta indices that are designed to capture the value premium. Classic value indices segment the market into value and growth stocks, and then apply capitalization weighting to the value segment of the market.
Nobel prize laureate Eugene Fama (pictured) and fellow researcher Kenneth French have revamped their famous 3-factor model by adding two new factors to analyze stock returns: Profitability and Investment. But this 5-factor model raises many questions.
The 2015 edition of the Global Investment Returns Yearbook contained several interesting long-term analyses. One chapter documents the existence of value and momentum effects for US and UK industry returns since 1900. This is yet another confirmation of the seemingly universal presence of these two effects.
Although Factor Investing is rapidly gaining popularity, there are still ongoing debates about this concept. In our view, the key feature of Factor Investing is that asset owners select factors and their weights themselves, rather than leaving this up to their asset managers.
Investors are worried about the high valuations of stocks in general and low-volatility stocks in particular. And so are we! In relative terms, low-volatility stocks have become more expensive during the last two years, but it’s not the first time. It happened first in 2008 and again in 2011.
Smart beta indices are a popular way of implementing a factor investing strategy. However, research suggests that this may not the best way, as the factor exposure provided by popular smart beta strategies varies greatly and they do not unlock the full potential of factor premiums.
Factor investing – the investment strategy that aims to capture ‘hidden’ returns in financial markets – is rapidly gaining in popularity. However, it is important to follow the right factors, and to be wary of one factor counteracting another, to get the best results. Otherwise, investors might follow generic factor strategies that expose them to risks that are not properly rewarded, resulting in inferior performance.
Investors looking for value in global equities have been disappointed in recent years, as ‘expensive defensive’ and growth stocks have held sway in markets. But over the long term, value investing can be shown to outperform growth investing, depending on the economic environment of the time, says Robeco portfolio manager Maarten Polfliet.
This study* shows that institutions typically trade on the wrong side of anomalies. For instance, they tend to buy growth stocks and sell value stocks, thereby going directly against the value anomaly.
In a recent webinar, Funds Europe spoke to Chris Hart, portfolio manager of the Robeco Boston Partners Global Premium Equities Fund, about how he seeks to tap into global opportunities from a value and growth perspective.
We provide empirical evidence that the Size, Low-Risk, Value and Momentum factors have significant risk-adjusted returns in the corporate bond market. By combining these factors in a multi-factor portfolio, drawdowns and tracking error vs. the market are reduced, while the higher return and Sharpe ratio are preserved.
The poor long-term live performance of the first generation of value indices indicates that capturing the value premium is not easy. This does not mean, however, that the value premium is beyond the reach of investors. We argue that a value premium still exists, but that harvesting it requires an approach that is much more sophisticated than simply following a straightforward value index.
To the best of our knowledge, no study has been conducted on the added value of innovative investment strategies that incorporate academic insights. As a result, we do not know how many investment managers have incorporated academic insights or how successful they are. We have researched the topic to fill this gap in the literature.
Some argue that the mere mechanism of rebalancing increases returns, and that this explains the success of factor investment strategies. Although factor strategies do need rebalancing to maintain their exposures, there are several reasons why it is unlikely that this is their source of added value.
Low-volatility stocks are in high demand. According to Pim van Vliet, portfolio manager of Conservative Equities, a generic low-volatility strategy is getting more expensive. An enhanced approach is necessary to prevent buying too expensive stocks.