Factor and Style Investing: January 2022

Growth, Value or Quality?

Recent market volatility has largely been predicated by a sharp reversal in tone by U.S. Fed officials, who – in an attempt to curb inflation (now at its highest levels in 40 years) – have moved swiftly from being doves to hawks, with quantitative easing moving to rapid tightening, and the first of several interest rate hikes in 2022 likely to be enacted in March. As bond yields have risen, an element of mean reversion has been going on, with out-of-favour value stocks rallying, and growth stocks giving up some of their post-pandemic gains.

In this selection of papers, commentators engage in an interesting debate over which investment style performs better in the current economic environment, with some suggesting that it's neither growth nor value that investors should be seeking, but quality. Robeco offers insights into which factors appear to offer alpha in emerging market debt, while other papers explore aspects of multi-factor investing.

Factor Indices: A simple compendium (S&P Dow Jones Indices, 2021)

S&P Dow Jones Indices notes how indices have evolved over time to provide more relevant benchmarks for investors with more specialist mandates. Factor indices are a prime example, and this compendium looks at eight attributes often associated with excess return. 

Macro Factor Investing with Style (Portfolio Management Research, 2022)

The authors of this paper look at how macroeconomic factors can be integrated into portfolios to better cope with growth and inflation concerns, by focusing on factors which are driven by growth and inflation, but which also exhibit defensive attributes. This approach offers flexibility to changing economic circumstances. 

Performance Attribution For Multi-Factorial Portfolios (BNP Paribas AM, 2021)

BNP Paribas AM offers updated insights into performance analysis and attribution of multi-factor investment strategies, which they argue offer some significant improvements, and which are integral in the portfolio construction phase. 

Alpha Concentration versus Diversification (Journal of Asset Management, 2021)

This paper investigates whether there are any benefits to investors in using concentrated or diversified multi-factor portfolios, and offers potentially important practical findings. 

Factor Investing in Emerging Market Credits (Robeco, 2021)

In this paper from Robeco, they investigate which, if any, factors predict future excess returns in emerging market hard currency bonds. Several factors do in fact appear to offer investors a superior return, both at a single- and multi-factor exposure. Other benefits are obtained from bottom-up allocations.

Value/Quality Rivalry and the 2022 Playbook (FTSE Russell, Jan 2022)

Equity market volatility has increased markedly in the early part of 2022, driven largely by more hawkish noises out of global central banks, led by the U.S. Federal Reserve. Factor returns are seeing some mean revision, and this paper looks at the tussle that is unfolding between Quality and Value.  

Quality Factor in Sector Investing (Quantpedia, 2022)

Quantpedia examines the definition of the quality factor and finds that while there may be some commonality of what attributes might go into a quality factor, there are also many different interpretations of what defines quality. This paper looks for ‘quality’ at a sectoral level and reaches some interesting conclusions. 

Factor Investing in Sovereign Bond Markets (Alpha Architect, 2022)

This is an academic review article. Guido Baltussen, Martin Martensty, and Olaf Penninga contribute to the factor investing literature with their June 2021 study 'Factor Investing in Sovereign Bond Markets: Deep Sample Evidence' in which they examined government bond factor premiums in a global sample over the period 1800-2020 and across 16 countries.

Global Factor Investing Study (Invesco, 2021)

For compliance reasons, this paper is only accessible in certain geographies

Invesco’s 2021 Global Factor Investing Study perpetuates their study into factor investing, a method of investing in securities with defined characteristics that, over time, have offered investors the advantageous combination of enhanced returns at an appropriate level of risk.  

U.S. Small Cap Index Performance – A comparison (S&P Dow Jones Indices, 2022)

S&P Dow Jones Indices offers some insights into how U.S. small cap indices may differ in their construction and performance. 

The Value Premium and Interest Rates Relationship (Alpha Architect, 2021)

In this short piece, Alpha Architect explores some of the literature comparing the sensitivities of value stocks to levels and changes in interest rates.

Low Vol Defies the Basic Finance Principles of Risk and Reward (Robeco, 2021)

Robeco’s paper draws the conclusion that counterintuitively, more volatile stocks tend to yield lower risk-adjusted returns, while less volatile stocks deliver higher risk-adjusted long-term performance. 

Quality the Decider in Battle Between Value and Growth (Lombard Odier IM, 2022)

For compliance reasons, this paper is only accessible in certain geographies

Lombard Odier argues that it need not be Growth or Value that prevails in this changing economic environment, but perhaps Quality stocks drawn from both camps that deliver.

Value or Growth When Inflation is High? (PGIM Quantitative Solutions, 2022)

PGIM Quantitative Solutions looks at the performance of Fama-French factors in periods of high inflation and contends that while historically, value has performed better than growth in such times, this time the inflationary economic environment might be different.