An introduction to factors: why have they created excess returns and how can they be combined to be even more effective?
On average, the most popular smart beta products only captured 17% of the factor they targeted. Our global equity team explains why.
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.
Matthew Peron is an Executive Vice President and Managing Director of Global Equity at Northern Trust in Chicago.
Most recently, Matt served as Director of Active Equity with responsibility for fundamental, quantitative, and tax-advantaged strategies. Prior to that role, Matt was the Director of Equity Research. In addition, Matt has lead-managed several investment strategies while at Northern Trust.
Prior to joining Northern Trust in 2005, Matt was the Deputy Chief Risk Officer for Alliance Capital Management. Previous experience includes equity portfolio management at Lincoln Capital Management. Matt has been in the financial industry since 1990 when he started his career on Wall Street.
Matt earned an MBA from the University of Chicago and a B.S. in electrical engineering from Swarthmore College.
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