Combines five theoretically and empirically robust single-factor strategies: value, low volatility, quality, momentum, and size.
- Value - The value premium delivers because performance chasers under-own value securities, preferring fast-growing glamour stocks.
- Low Volatility - The low-volatility premium delivers because investors’ preference for gambling leads them to over-own high-volatility securities, effectively as lottery tickets.
- Quality - The quality premium delivers because investors are attracted to the glamour of empire-building companies and underappreciate conservative capital allocators with wide economic moats.
- Momentum - The momentum premium delivers because uninformed investors are slow to react to new information about a company.
- Size – The preceding factor premiums tend to work better in small-capitalization markets because these markets tend to be less efficient and experience larger pricing errors.
Provides a diversified exposure to those factors expected to produce long-term positive excess returns. Diversifying the factors in a portfolio substantially lowers tracking error and provides shorter periods of underperformance compared to a single-factor strategy. This diversification allows for a smoother path to outperformance. Each single-factor strategy (excluding momentum) is fundamentally weighted to break the link between price and weight, thus avoiding exposure to trendy, overpriced securities
Incorporates thoughtful design and implementation that allows for straightforward performance measurement and governance. Combining the single-factor strategies to create a multi-factor index results in a transparent approach with clear performance attribution, low governance requirements, and low costs.
Offers the potential for added returns through a dynamic weighting process. Dynamically rebalancing the individual factors in the strategy, based on each factor’s long-term reversal and short-term momentum scores, results in higher allocations to factors with attractive relative valuations that are also experiencing a momentum upswing.