Strong factors work better when combined because they smooth returns over time. Even more, mixing the quality factor with other factors is especially powerful.
Quality is the most powerful factor, but the hardest to define. Learn how Northern Trust Asset Management defines it — and how our proprietary quality score precisely targets this valuable factor.
Over the past 50 years, research shows that virtually all outperformance in the stock market has been driven by factors*. Investors create factor investments by grouping stocks with similar characteristics such as quality, size, momentum, dividend yields, low volatility and value.
Smart beta has become the industry catch-all term for investment strategies that use alternatively weighted approaches, unlike traditional products weighted by market capitalization. While many smart beta products target equity factors by weighting certain underlying company characteristics, they can be inefficient. The best factor-based investing strategies target intended factors, while controlling for unintended risks, to deliver the most efficient factor exposure possible.
*Carhart, Mark M. "On persistence in mutual fund performance." The Journal of Finance 52.1 (1997): 57-82.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC and personnel of The Northern Trust Company of Hong Kong Limited and the Northern Trust Company.©2017 Northern Trust Corporation.