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Factor investing revisited

Factor investing revisited

15-09-2015 | Research

Does strategic allocation to well-know factors really work? In this study, we provide new out-of-sample evidence that factors add value.

  • David Blitz
    David
    Blitz
    Head of Quant Research

Speed read

  • Five years of fresh data show factor investing continued to work
  • We investigate two new factors: profitability and investment
  • Factor investing can be implemented “long-only”

This paper1 takes another look at the recommendation of Blitz [2012] to allocate strategically to the value, momentum, and low volatility factor premiums in the equity market. Five years of fresh data show that such a factor investing strategy continued to deliver out-of-sample.

The potential added value of the two new factors in the Fama-French five-factor model, operating profitability and investment, is investigated and found to depend critically on the performance metric that is considered most important. The paper also reviews the role of small-cap stocks, factor timing, long-only versus long-short portfolio construction, international evidence, and factor investing beyond equities.

1Blitz, D. C., 2015, ‘Factor investing revisited’, The Journal of Index Investing.

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