Factor/Style Investing
A New Core Equity Paradigm
March 1, 2013
Topics - Factor/Style Investing Value Momentum Equities
Investors have intuitively pursued different investment styles, or strategies, for decades. Many styles have been identified — size and value were among the first to be studied by academics — and practitioners are continually combing markets for evidence of new ones that work as well. Successful styles tend to be:
- Persistent (consistently beats a benchmark across stocks, industries and geographies)
- Systematic (has a process that performs well with different securities)
- Intuitive (there is a logical economic reason why it works)
We have found that three styles are particularly useful in actively managed long-only equity portfolios: value, momentum and profitability. Ample evidence shows that each of these styles can generate long-term excess returns on its own — and go a long way toward explaining why some portfolio managers excel — but research suggests that these styles work even better when united.
Combining successful investing styles to magnify their effects represents a new paradigm in active equity-portfolio management. Rather than pursue the traditional notion of alpha that is rare, fleeting and difficult to scale, a styles-based approach like Core Equities may offer a more-persistent, systematic and intuitive approach. By integrating value, momentum and profitability styles, this approach can yield a diversified, fully invested, long-only portfolio of individual stocks with well-constructed exposures to investing styles that are known to provide better risk/reward tradeoffs than both the broad market and traditional core strategies (which are often too narrow for investors’ own good).
This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
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