Quality Investing

The Financial Distress Puzzle

The empirical research findings demonstrate that the return premium generated by being long low-distress risk stocks and short high-distress risk stocks is persistent and that the capital asset pricing model (CAPM) and the Fama-French three-factor models cannot explain it. Hence, we have the distress puzzle, or anomaly.

How factor exposure changes over time: a study of Information Decay

Factor strategies need to be rebalanced in order to maintain their factor exposure. But different factors decay at different rates and this affects how they should be rebalanced. For example, momentum needs to be rebalanced more than value. This study digs into these questions.

Lottery Demand and the Asset Growth Anomaly

It is well documented in the literature that over the long term, low-investment firms have outperformed high-investment firms—with the negative relation between asset growth (AG) and future stock returns particularly featured by the overvaluation of high AG stocks.

The Unintended Consequences of Single Factor Strategies

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

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.

The R&D Premium: Is it Risk or Mispricing?

Asset pricing models are important because they help us understand which factors explain the variation of returns across diversified portfolios. However, models are not like [...]

The Quality Factor—What Exactly Is It?

The existence of a quality premium in stocks that has been persistent over time, pervasive around the globe, and robust to various definitions have been [...]

The Quality Factor—What Exactly Is It?

While the quality factor has been identified in the literature (including papers such as “Buffett’s Alpha,” “Global Return Premiums on Earnings Quality, Value, and Size,” [...]

Crisis proof your portfolio: part 2/2

The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed? Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor, [...]

Crisis Proof Your Portfolio: part 1/2

The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed? Campbell R. Harvey, Edward Hoyle, Sandy Rattray, Matthew Sargaison, Dan Taylor, [...]

Factor Investing Research On Steroids

Factor Premia and Factor Timing: A Century of Evidence Antti Ilmanen, Ronen Israel, Toby Moskowitz, Ashwin Thapar, and Franklin Wang Working paper A version of [...]

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