Factor Investing Revisited

Abstract

This paper takes another look at the recommendation of Blitz [2012] to allocate strategically to the value, momentum, and low-volatility factor premiums in the equity market. Five years of fresh data show that such a factor investing strategy continued to deliver out-of-sample. The potential added value of the two new factors in the Fama–French five-factor model, operating profitability and investment, is investigated and found to depend critically on the performance metric that is considered most important. The paper also reviews the role of small-cap stocks, factor timing, longonly versus long-short portfolio construction, international evidence, and factor investing beyond equities.

TOPICS: Factor-based models, portfolio construction, volatility measures