“It took a long while. Kewei, Chen, and I first documented some of the evidence when we were working on our q-factor paper back in 2014.1 At the time, we coded up about 80 anomaly variables, but only 35 were significant. In particular, 12 out of 13 liquidity variables failed to hold up. The editor of our article, Professor Geert Bekaert, deserves a huge amount of credit for guiding our q-factor paper and letting it see the light of day. While editing our work, Geert told us that he found our evidence that so many well-known anomalies are insignificant very important, and wanted us to highlight it more. We did. But since the objective of that article was to establish a new workhorse factor model, we did not make the evidence the centerpiece of the article.”
“Back in 2015, Eugene Fama and Kenneth French responded to our q-factor paper by incorporating two factors that resemble our investment and return on equity factors in the q-factor model into their three-factor model to form a five-factor model.2 And the Factors War was on. We quickly fired back with the working paper ‘A comparison of new factor models’, which compares our q-factor model with their five-factor model on both conceptual and empirical grounds.3 Our key evidence is that the q-factors subsume their CMA and RMW factors, but their factors cannot subsume ours in factor spanning tests.”
“Alas, that paper met with considerable resistance in the editorial process. Knowing very well what it takes to debate with Fama and French on their home turf, we set out to clear a higher hurdle with respect to incremental contribution, by replicating virtually all of the published literature about anomalies. Our initial thought was to compile the largest set of testing portfolios to test factor models, and to hold up our work against the competitive pressure from Fama and French.
“The tremendous amount of respect we have for Fama and French is borne out in the massive effort we put into ‘Replicating anomalies.’ It is probably worthwhile pointing out that we did not set out to beat down the literature on anomalies. We were focusing on the right-hand, not the left-hand side of factor regressions. After three years of coding, it finally dawned on us that most anomalies fail to hold up, 64% to be precise. The evidence is undeniable.”
“Professor Chen Xue at the University of Cincinnati is the real hero behind our ‘Replicating anomalies’.4 I went through the published anomalies literature, and wrote a first draft of our data appendix. I knew a lot of the classic anomalies, but needed a refresher course on those documented in the past ten years, so it was not time-consuming for me. It was Chen who painstakingly coded up all 447 anomalies, one-by-one, making sure that we followed the variable definitions in the original studies, and when our replication results differed from those originally reported, making sure we understood why. Professor Kewei Hou went through Chen’s SAS programs to ensure that our empirical execution was of the highest possible quality.”
“In our replication, we emphasized a reliable set of empirical procedures that use NYSE breakpoints and value-weighted portfolio returns. This set of procedures is more reliable because it better captures the economic importance of an anomaly. For comparison, in our June 2017 draft, we also reported results from NYSE-Amex-NASDAQ breakpoints and equal-weighted returns, a procedure that gives microcaps excessive weights. We are currently compiling results from a variety of additional procedures, including cross-sectional regressions.”
“The main conclusion is that most anomalies fail to replicate. To be precise, only 36% of the anomalies in our large universe withstood the replication tests. The survival rate is largely in line with those reported in other scientific disciplines such as psychology and oncology.”
The challenge is to figure out which factors are the most relevant to forecast returns
“Not at all. First, the line between active and passive strategies has blurred substantially in the past decade. In the old days, ‘passive’ literally meant holding the market portfolio, and ‘active’ meant everything else. Nowadays, ‘passive’ refers to predetermined algorithm-based strategies, and ‘active’ means there is more human involvement, I think. One may argue that factor investing built on the cross-sectional predictability in finance literature is passive in nature, according to the new definition.”
“Regardless of the passive-active dichotomy, our work does not discredit factor investing at all. On the contrary, we document reliable cross-sectional predictability in a universe in which frictions seem to play a negligible role. When you take 36% of 447, you still get 161 significant anomalies even in value-weighted returns. We show that our latest factor models still leave as many as 46 anomalies unexplained. In short, the future of factor investing is bright! The challenge is to figure out which factors are the most relevant to forecast returns, and that’s the essence of the new ‘active’.”
This article is an excerpt of a longer text published in our Robeco Quarterly magazine. Read the full ‘‘Most reported anomalies fail to hold up" article.
1K. Hou, C. Xue, and L. Zhang 2015, ‘Digesting anomalies: An investment approach’, Review of Financial Studies 28, 650-705.
2E. F. Fama, and K. R. French, 2015, ‘A five-factor asset pricing model’, Journal of Financial Economics 116, 1-22
3K. Hou, C. Xue, and L. Zhang, 2014, ‘A comparison of new factor models’, NBER Working Paper No. 20682, November 2014.
4K. Hou, C. Xue, and L. Zhang, ‘Replicating anomalies,’ NBER Working Paper No. 23394, May 2017.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.