Global Factor Performance: March 2022
Factor Updates for: Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
New Accounting Standards and Factor Investing
How well do quantitative investors navigate around the changes to the accounting standards that are endemic to the financial data used in quantitative strategies? The numbers reported on financial statements are wholly governed by regulation and by each firm’s interpretation of those accounting standards. So how do quants stick to their empirical evidence on old data methods or do they react in terms of the strategy when the change in standards is material?
Factor Investing: Are Internally Generated Intangibles Worthless?
As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value. In fact, Amitabh Dugar and Jacob Pozharny, authors of the December 2020 study “Equity Investing in the Age of Intangibles,” concluded that the relationship between financial variables and contemporaneous stock prices has weakened so much for high intangible intensity companies in both the U.S. and abroad that investors can no longer afford to ignore the changes in the economic environment created by intangibles.
Factor Investing: Is a Human Capital Factor on the Horizon?
Taken together, our results suggest that firms’ personnel expenditures reflect not just the cost of labor in the current period but also the investment in human capital contained within that cost, and that market participants fail to fully understand the opportunity and efficacy of human capital development embedded in the disclosure of the expense.
Global Factor Performance: February 2022
The factor performance modules have been updated on our Index website
Is The Value Premium Smaller Than We Thought?
From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could have caused assumptions to change about why the premium should exist/persist.
What Explains the Momentum Factor? Frog-in-the Pan is Still the King.
Having conducted an inordinate amount of research on the momentum factor, we find it comforting (likely due to confirmation bias!) that independent researchers have identified the same thing we have found -- frog in the pan is a robust way to measure momentum if one is seeking to take advantage of the momentum factor.
Portfolio Strategies for Volatility Investing
Negative outcomes from unconditional long exposure to the VIX led Campasano to examine the performance of an Enhanced Portfolio that dynamically invests in the S&P 500 Index and VIX futures.
What Relative Sentiment Says About Market Regime Change
The weight of the evidence suggests we recently exited a secular bull market driven by high real earnings growth and have entered a secular bear market driven by high inflation. The takeaway is that while investors have become highly conditioned to buy the dip, the current dip is occurring with relative sentiment significantly bearish (i.e., retail likes equities more than institutions). Historically, that has not been a great time to buy equities.
The Best Strategies for Dealing with Inflation? Factors and Trend-Following
Inflation -- what's that? ... It has been quite a while since inflation has been considered a problem. Today, however, the angst surrounding the possibility of a resurgence in inflation is real and “top of mind” for investors. If the current fear becomes a reality, how should investors react? What strategies and asset classes perform well in a rising inflationary environment? If inflation does resurge beyond a temporary phase, how should investors restructure or reposition their portfolios? The purpose of this article is to provide context for those decisions.
Factor Investing in Sovereign Bond Markets
The reported results we covered have important implications for investors in terms of portfolio construction, risk monitoring, and manager selection. Because these common factors explain almost all the returns of bond portfolios, investors should construct their bond portfolios using low-cost, passively (systematically) managed funds with these factors in mind and then carefully monitor their exposure to these systematic risks.
Asset Allocation and Private Market (i.e. illiquid) Investing
Allocations to illiquid assets have become increasingly popular requiring asset managers to consider portfolio-wide liquidity characteristics. Although determining the price of illiquidity is a challenge for investors, the construction of a portfolio that includes liquidity constraints can be even more daunting. How do we optimize asset allocation with liquidity as a significant constraint on the portfolio?
Understanding Momentum Investing
The main takeaway for investors is that Kelly, Moskowitz, and Pruitt demonstrated that past return characteristics are strongly predictive of a stock’s realized exposures to common risk factors, providing direct evidence that price trend strategies are in part explainable as compensation for common factor exposures—past returns predict betas on factors and those factors have high average returns.
The Illiquidity Discount is an Opportunity Cost
Private investment opportunities seem to have been filling investors' portfolios. These investment vehicles come with a discount to the assets value to pay investors for taking on illiquidity risk. Readers of this article are treated to the development of a theory and a practical model that quantifies the illiquidity discount.
Our Top 5 Geeky Finance Posts for 2021
We are calling it quits for the holidays. Most of us have kids and Santa is coming to town!
We'll talk research and educate investors next week.
Here are the Top 5 content pieces this year (Based on traffic):
Value investing: What history says about five-year periods after valuation peaks
Value stocks are historically cheap compared to the past. Given this fact, a natural question is the following, "After the last two times Value had a "peak" of the factor being cheap, how did it do the subsequent five years?"
The Relationship Between the Value Premium and Interest Rates
We've been suffering through the deepest and longest drawdown in values history. Looking for a scapegoat to explain the lackluster performance many have pointed to low interest rates as the root cause of the underperformance. The question is have interest rates impacted value in the past?
ESG Investing: Dissecting Green Returns
In theory green stocks should have lower expected returns, this however, is not what we've seen. So the question is what has caused the outperformance of green stocks? And has that outperformance cost value investors their returns?
Does the Market Efficiently Price the Value of Brands?
Despite the fact that a company’s internally generated intangible investments create future value, under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development is an important intangible asset, so too is branding. Omission of an increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value.
Global Factor Performance: December 2021
factor performance modules have been updated