An investment approach that uses smart rules for stock selection and portfolio construction. The aim of this is to increase returns and to lower both risks and costs.
In addition, we select not only individual factors, but also include others in the assessment to prevent the positive effect of one factor being eradicated by the negative effect of another.
Example: when following a pure momentum strategy, investors pick mainly stocks with a high valuation. As a result, the Value factor will have a negative effect on returns. However, by also taking this factor into account, investors can avoid paying too much for momentum stocks.
A number of things stand in the way of actually harvesting factor premiums, and transaction costs form one of the biggest obstacles. An efficient approach is one that limits the number of transactions. Another aspect is to obtain effective distribution over sectors in order to prevent excessive dependency on any one specific sector.
Ultimately, this approach will lead to much higher expected returns at a lower level of risk. The table below shows the results of this efficient approach using three factors relative to the market-weighted index.