Why Multi-Factor Investing?

Individual factors alone don’t always outperform the stock market.  Superior performance comes from combining the right factors.

multi-factor-portfolio

Combining Factors

Truly balanced portfolios are not geographic or sector diversified, but rather diversified across factors. 

Multi-Factor combinations mitigate the impact of cyclicality of traditional strategies such as value, momentum, and volatility.

boom-and-slowdown

What Are Factors

A factor can be any persistent characteristic relating a group of securities that is important in explaining their returns and risk.

Quantalytics Research develops differentiated proprietary versions of common fundamental factors.

Value
valueWhat Is It? Captures excess returns to stocks that have low prices relative to their fundamental valueExample: Book to price, earnings to price, book value, sales, earnings, cash earnings, net profit, dividends, cash flow
Quality
qualityWhat Is It? Captures excess returns to stocks that are characterized by low debt, stable earnings growth, and other “quality” metrics.Example: ROE, earnings stability, dividend growth stability, strength of balance sheet, financial leverage, accounting policies, strength of management, accruals, cash flows
Momentum
momentumWhat Is It? Reflects excess returns to stocks with stronger past performanceExample: Relative returns (3-mth, 6-mth, 12-mth, sometimes with last 1mth excluded), historical alpha
Volatility
volatilityWhat Is It? Captures excess returns to stocks with lower than average volatility, beta, and/or idiosyncratic riskExample: Standard deviation (1-yr, 2-yrs, 3-yrs), Downside standard deviation standard deviation of idiosyncratic returns, Beta
Size
sizeWhat Is It? Captures excess returns of smaller firms (by market capitalization) relative to their larger counterpartsExample: Market capitalization (full or free float)

 

Source:MSCI

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