Practical Applications of For Style Factors, One Size Does Not Fit All

Practical Applications Summary

In For Style Factors, One Size Does Not Fit All, from the Winter 2017 issue of the Journal of Investing, Melissa R. Brown (of Axioma) argues that investment managers who use factors to generate alpha should consider those factors’ performance across time and geographic location to determine the appropriateness of the associated risk. Not all factors are compensated over time, and risk-only factors (e.g., leverage, liquidity, and exchange rate sensitivity) can add significant risk to a portfolio. Brown draws on annualized returns for several major factors from 1999 through 2016 in the United States, Europe, and Japan to illustrate the wide variety in factor returns over time and region. Ultimately, she argues that one size does not fit all in factor investing; investors must first define their goals before selecting factors to include in their portfolios.

TOPICS: Analysis of individual factors/risk premia, portfolio construction