Style premia are an alternative source of returns, and may potentially help both to enhance portfolio returns and to reduce risk through better diversification. Empirical evidence and economic rationale support the notion that style premia have arguably as strong a claim for strategic inclusion in portfolios as major market risk premia.
Beyond this, we believe style premia are especially relevant today given that most investors face the twin challenges of 1) low expected returns in traditional asset classes and 2) portfolios that are dominated by the direction of equity markets.
The styles that have historically been most pervasive across asset classes and geographies are Value, Momentum, Carry and Defensive. The ideas underlying each are well-known and time-tested: buy cheap assets against expensive ones, buy last year’s winners against laggards, buy high-yielders against low-yielders, and buy more defensive securities against their speculative peers.
These styles can be applied in many asset class contexts and have generated attractive long-run returns in virtually every place we have studied them.