Berkin and Swedroe’s Factor Investing Book

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Berkin and Swedroe’s Factor Investing Book

By | 2017-08-18T17:09:24+00:00 February 1st, 2017|Factor Investing, Research Insights, Book Reviews|8 Comments

Well, I was midway through a formal book review on Larry and Andrew’s new book, “Your Complete Guide to Factor-Based Investing,” when I noticed that the team over at GestaltU already wrote the review I was going to write — great job and I encourage everyone to read it.

larry factor book

So we won’t rehash what has already been said about Larry and Andrew’s book, instead, I’ll bullet point our thoughts (with links to various research articles) on a variety of topics discussed in the book. Also, I want to encourage anyone interesting in factor investing to grab a copy of this book and take the content to heart. Larry and Andrew do an exceptional job exploring the factor zoo and summarizing which animals you should potentially visit.

factor zoo

Let’s begin.

A Framework for Identifying Investment Factors

First, I really like the framework the authors posit for the selection of “factors.” Here are the 5 elements which are described in the GestaltU review:

  • Be persistent over a long period of time, and across several market cycles;
  • Be pervasive across a wide variety of investment universes, geographies, and sometimes asset classes;
  • Be robust to various specifications;
  • Have intuitive explanations grounded in strong risk and/or behavioural arguments, with reasonable barriers to arbitrage; and,
  • Be implementable after accounting for market impacts and transaction costs.

Many of these concepts are described in detail by Antti Ilmanen in one of the most impressive and informative slide decks I’ve seen in a long time.

aqr slides

Note the 5 elements are essentially described in the deck: persistent, pervasive, robust, intuitive, and implementable

Bottomline? When Swedroe/Berkin and the AQR crew are aligned on something, we should probably consider it a good idea.

What Factors “Matter” According to Berkin/Swedroe?

  • Market beta
  • Size
  • Value
  • Momentum
  • Profitability & Quality
  • Term
  • Carry
  • Low-volatility
  • Default
  • Time series momentum (i.e., trend-following)

Our Thoughts on These Factors

Larry and Andrew do a wonderful job documenting a lot of the literature related to each of the factors discussed. In the section below we list all of their factors and articles we’ve done on these same subjects (some are discussed in the book). We also provide a high-level score based on our take on the evidence. In general, we pretty much agree with almost all of the sentiments expressed in the book (Warning. Warning. Warning. Group think alert, group think alert!).

Here is our ranking system:

  • Gold (top-tier factor)
  • Silver (solid factor)
  • Bronze (second-tier factor)

The list of Larry/Andrew’s favorite factors with our rough rank order of evidence and sustainability out of sample.

There you have it on the factors. But always remember: no pain, no gain. Financial markets — while perhaps not the greatest at setting perfect prices — are extraordinarily good at matching buyers and sellers. In the end, a factor can only work to the extent they earn a natural risk/mispricing premium that investors are willing to pay in order to offload the exposure. To the extent that the market determines that the risk/mispricing premium isn’t worth the costs, these factors can vanish in the blink of an eye.

Good luck!

PS. We have a monster factor investing post coming out tomorrow. Stay tuned.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  1. Nick de Peyster, CFA, CFP February 2, 2017 at 9:11 am

    I would rate size a bronze or less. For me, the intuition doesn’t make much sense. I know what the data says, but I don’t think the rationale for size is nearly as persuasive as value and momentum.

    Nick de Peyster

    • Wesley Gray, PhD
      Wesley Gray, PhD February 2, 2017 at 11:00 am

      I think the risk rational/evidence is pretty solid, no? Tougher access to capital, less liquid, less diversified, etc. That is why we felt it was a real factor like beta/term, albeit, not a “mispricing” factor…

  2. Dan Grioli
    MarketFox February 5, 2017 at 6:01 am

    Wes – 2 questions about about your factor rankings.

    1) How much of the ranking depends on 30-years of falling interest rates?

    2) Do the same rankings apply outside the US?

    As an Australian-based investor I can attest to the fact that factor-based strategies work very differently in concentrated markets. I’m sure the Scandinavians and Canadians have similar experiences.

    Value don’t seem to work that well in Australia, nor does size. For example, the poor performance of EW vs market cap.

    • Wesley Gray, PhD
      Wesley Gray, PhD February 5, 2017 at 2:22 pm

      1) Term realized returns are good because of the tailwind — definitely. But Term (or duration) can also get killed. This is why I think it is a real “factor” and will likely earn an excess return over time — you have to pay someone to take duration risk off your hands. Not sure how it influences the other factors, save low-vol, where there are some effects.
      2) Agreed. Moved momentum ahead of value, where it should rightfully sit.

  3. Mitesh Patel February 9, 2017 at 5:04 pm

    If we compare investing to driving on the highway, then I suppose

    * Momentum corresponds to picking the current fastest lane,

    * Value the current slowest,

    * Size the lane with smallest, nimblest vehicles,

    * Carry the lane with the most (tow) trucks,

    * Low-volatility the steadiest moving lane,

    * Profitability & quality the lane with vehicles least likely to break down and the best drivers,

    * Default (credit) the lane with vehicles least likely to crash or be repossessed en route


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