A New Core Equity Paradigm

March 01, 2013

AQR White Paper

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).

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
  • This information 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.
  • Past performance is no guarantee of future results.
  • Certain publications may have been written prior to the author being an employee of AQR.