An updated paper by David Blitz, head of quantitative equity research at Robeco Asset Management, re-examines value, momentum and low-volatility equity premiums with five years of additional data. It also looks at the two additions in the latest Fama-French five-factor model.
Better returns: An equal-weighted three-factor model added 370 basis points of return annually over the entire sample period. Despite strong market returns in the past five years, the three-factor portfolio added 1.9 percentage points annually. The author concludes that while (over the full sample) the two new factors (profitability and investment) do not appear to add value, they do not destroy value. And using different (forward-looking) estimates, they could “earn a place in a diversified factor mix.”
Factor favors: The most-attractive stock portfolios (top 30%) based on value, momentum and low-volatility factors produced better risk-adjusted returns than the market. Those with the opposite factor exposures (bottom 30%) underperformed.
*Three factor is a portfolio that every month invests one-third each in the value, momentum and low-volatility strategies. Source: Factor Investing Revisited
Compiled and designed by Timothy Pollard and Gregg A. Runburg