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Study finds robust multi-factor equity investing aids outperformance


Research Affiliates has published a new study looking at the recent proliferation of investment factors, and how investors should look at them with a view to maximising returns.

Authored by Chris Brightman (pictured), Vitali Kalesnik and Feifei Li, the paper ultimately looks at the vast proliferation of investment factors, in both academic studies and investment products, and whether only a select few of these provide above market returns with reduced volatility and underperformance.
Research Affiliates finds that a strategy invested in a handful of factors will maximise risk adjusted returns. A smart beta strategy diversified across robust factors can outperform the market with substantially lower tracking error and shorter periods of underperformance. Furthermore, dynamic rebalancing materially increases expected returns relative to rebalancing to equal weights.

Factor proliferation persists with many academic journals documenting over 300 distinct factors and more each year.

The firm writes that its research leads them to conclude that only a handful of factors offer the potential for long-term outperformance: value, profitability, investment, size, low beta and momentum.

“Multi-factor equity investing using these robust factors is a reliable strategy for outperforming the market without the burden of excessive volatility.
“Systematic rebalancing to fixed weights—reducing exposure to popular factors that have outperformed over recent years, while increasing exposure to the out-of-favour factors that have underperformed—will likely improve performance relative to a buy-and-hold weighting.

“Dynamically rebalancing factor exposures using short-term momentum and long-term reversal signals further improves the return.”

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