PT - JOURNAL ARTICLE AU - David Blitz AU - Milan Vidojevic TI - Practical Applications of The Characteristics of Factor Investing AID - 10.3905/pa.7.1.335 DP - 2019 Jul 31 TA - Practical Applications PG - 1--5 VI - 7 IP - 1 4099 - https://pm-research.com/content/7/1/1.10.short 4100 - https://pm-research.com/content/7/1/1.10.full AB - In The Characteristics of Factor Investing, from the 2019 Quantitative Special Issue of the Journal of Portfolio Management, David Blitz and Milan Vidojevic (both of Robeco Asset Management) argue that generic factor-based investment strategies experience lower returns because they disregard the effects of other factors. For instance, the expected returns of two top-quintile value stocks can potentially be determined by each stock’s exposure to momentum or profitability characteristics—which can differ significantly from one stock to another.The authors developed a characteristics-based multifactor model based on the six most common factor characteristics and tested its ability to explain returns of five prominent factor investing styles: size, value, profitability, investment, and momentum. The model was able to explain performance differences in factor-based strategies and weighting schemes in terms of factor exposure, suggesting that effective factor investing must account for all relevant drivers of expected stock returns, not just a single targeted factor.TOPICS: Factor-based models, portfolio construction, in portfolio management