2016 Factor Alpha Newsletter
We focus on factors because of the reason behind why they work, not the performance. In any given year, one factor can do well or poorly, creating “noise” in the long-term process. This is why we blend factors together to build proprietary multi-factor themes.1 Singling out a factor for good/bad performance is not what we do — instead, we look for conceptual ideas that exhibit long-term efficacy.
Using the All Stocks Universe2 as a guide, this inaugural edition of the Factor Alpha Newsletter (FAN) offers a live-time snapshot of the past 12 months. These are the drivers of our “Factor Attribution Tool” (see Measuring “Factor Alpha” for more info), which we built several years back for our quarterly strategy commentaries.
It’s important to note that we don’t use themes in isolation to build our conviction-weighted high active share portfolios (we use various combinations of multiple themes, tailored to each strategy). With that in mind, take a look at the year 2016 from a factor investor’s perspective.
First, we’ll isolate the difference in performance associated with a benchmark’s market cap-weighted methodology3 versus an equal-weighted selection universe:
Size: “Market Cap-Weighted” less “Equal-Weighted”
(Cumulative excess returns, 1/1/16–12/31/16)
Next, the cumulative excess returns (1/1/16–12/31/16) for the top deciles4 of each theme versus the entire All Stocks Universe:
Stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.
Stocks with impressive and stable recent total returns.
OSAM Financial Strength
Stocks that use debt responsibly, and aren’t overly reliant on outside financing.
OSAM Earnings Growth
Stocks whose profitability is high and trending up.
OSAM Earnings Quality
Stocks with strong cash flows and conservative accounting.
Stocks returning high amounts of cash to shareholders through dividends and buybacks.
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- All factor portfolios are calculated using a compositing methodology. Monthly portfolios are created with a 12-month holding period, then the 12 monthly portfolios are combined to create the composite portfolio.
- Stocks included in the Compustat Database listed on a U.S. exchange with a market value greater than $200M and a price per share greater than $1. The stocks are equal-weighted.
- Usually based on a single factor, such as the ubiquitous Price-to-Book.
- For example, OSAM Value’s “top“ decile is “the cheapest 10% of stocks” within the universe.