Factor Investing: Smart Beta Pursuing Alpha
September 28, 2018 | ECONOMICS & INVESTING
Sources and Disclosures:
1 MSCI, Foundations of Factor Investing. December 2013
2 Vanguard, Factor-based investing. April 2015.
3 Fama, Eugene F., and Kenneth R. French, 1992. The Cross-Section of Expected Stock Returns. Journal of Finance 47:427–65.
4 Fama, Eugene F., and Kenneth R. French, 1993. Common Risk Factors in the Returns on Stock and Bonds. Journal of Financial Economics 33: 3–56.
5 Harvey, Campbell R., Yan Liu, and HeqingZhu. 2014. “…and the Cross-Section of Expected Returns.”
6 MSCI, Foundations of Factor Investing. December 2013
7 Source: Bloomberg, BCM Research. Longer time period was selected as the longest time series for which all six factor
indexes had available data concurrently.
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Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. An investment cannot be made directly in an index.
The Standard & Poor’s (S&P) 500® Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are not managed and do not incur fees or expenses. “S&P 500®” is the registered mark of Standard & Poor’s Financial Services, LLC .
MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 620 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI USA Momentum Index is based on MSCI USA Index, its parent index, which captures large and mid cap stocks of the US market. It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.
The MSCI USA Enhanced Value Index captures large and mid-cap representation across the US equity markets exhibiting overall value style characteristics. The index is designed to represent the performance of securities that exhibit higher value characteristics relative to their peers within the corresponding GICS® sector. The value investment style characteristics for index construction are defined using three variables:
Price-to-Book Value, Price-to-Forward Earnings and Enterprise Value-to-Cash flow from Operations.
The MSCI USA Risk Weighted Index is based on a traditional market cap weighted parent index, the MSCI USA Index, which includes US large and mid cap stocks. Constructed using a simple, but effective and transparent process, the MSCI USA Risk Weighted Index reweights each security of the parent index so that stocks with lower risk are given higher index weights. The index seeks to emphasize stocks with lower historical return variance and tends to have a bias towards lower size and lower risk stocks.
The MSCI USA Sector Neutral Quality Index captures large and mid-cap representation across the US equity markets. The index aims to capture the performance of securities that exhibit stronger quality characteristics relative to their peers within the same GICS® sector by identifying stocks with high quality scores based on three main fundamental variables: high Return-on-Equity (ROE), low leverage and low earnings variability.
The MSCI USA Minimum Volatility (USD) Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid cap USA equity universe. The index is calculated by optimizing the MSCI USA Index, its parent index, in USD for the lowest “absolute risk (within a given set ofconstraints).
The views and opinions expressed throughout this paper are those of the author as of August 2018. The opinions and outlooks may change over time with changing market conditions or other relevant variables.
This material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of securities nor does it constitute investment advice for any person.