Quality Investing

The Unintended Consequences of Single Factor Strategies

By |June 10th, 2022|Quality Investing, Research Insights, Factor Investing, Larry Swedroe, Value Investing Research, Momentum Investing Research|

Since the 1992 publication of “The Cross-Section of Expected Stock Returns” by Eugene Fama and Kenneth French factor-based strategies and products have become an integral part of the global asset management landscape. While “top-down” allocation to factor premiums (such as size, value, momentum, quality, and low volatility) has become mainstream, questions remain about how to efficiently gain exposure to these premiums. Today, many generic factor products, often labeled as “smart beta”, completely disregard the impact of other factors when constructing portfolios with high exposures to any single factor. However, recent research, such as 2019 study “The Characteristics of Factor Investing” by  David Blitz and Milan Vidojevic, has shown that single-factor portfolios, which invest in stocks with high scores on one particular factor, can be suboptimal because they ignore the possibility that these stocks may be unattractive from the perspective of other factors that have demonstrated that they also have higher expected returns.

Strategies to Mitigate Tail Risk

By |May 26th, 2022|Quality Investing, Crisis Alpha, Research Insights, Factor Investing, Larry Swedroe, Trend Following, Academic Research Insight, Momentum Investing Research|

Investors care about more than just returns. They also care about risk. Thus, prudent investors include consideration of strategies that can provide at least some protection against adverse events that lead to left tail risk (portfolios crashing). The cost of that protection (the impact on expected returns) must play an important role in deciding whether to include them. For example, buying at-the-money puts, a strategy that eliminates downside risk, should have returns no better than the risk-free rate of return, making that a highly expensive strategy.

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