7 August 2023
Benefits of Multi-Dimensional Stock Selection Approaches [EN]
While the typical factor investors may be willing to gain exposure to risk factors through pure strategies and combine them into their own portfolio independently, researchers demonstrated that combining factor screening iteratively could be a more profitable risk-adjusted method. This entails that owning the top momentum stocks within the top profitable, within the top cheapest universe appears to have fueled better returns than owning top value, top profitability and top momentum equities within the universe over the 1991-2019 period and on a risk-adjusted basis.
This is quantified in the following piece of research1 in which a systematic process is used to build pure, mixed and iterative equally weighted factors portfolios of European corporate equities. It finds that iterative methods yield better risk-adjusted returns than mixed and pure equally weighted factor portfolios over the long run. The paper also highlights that factor performance changes over time, with momentum becoming stronger through the sample period.
In conclusion, the power of effectively combining several risk factors exposure and the ordered structure of the factor filtering is a key part in the portfolio management. This method has delivered strong and statistically significant alpha from 1991 to 2019 and may continue to deliver it along with competitive risk-adjusted returns.
1Bermejo, R., Figuerola-Ferretti, I., Hevia, T., & Santos, A. G. G. Y. (2021). Factor investing: A stock selection methodology for the European equity market. Heliyon, 7(10), e08168. https://doi.org/10.1016/j.heliyon.2021.e08168
Junior Investment Analyst
The figures, comments, opinions and/or analyses contained herein reflect the sentiment of RAM with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
This document is intended solely to provide general and introductory information to the readers, and notably should not be used as a basis for any decision to buy, sell or hold an investment. Under no circumstances may RAM be held liable for any decision to invest, divest or hold an investment taken on the basis of these comments and analyses.
RAM therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of RAM. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.