Our approach:
Research shows that exposing portfolios to three factors will very reliably explain virtually all portfolio performance - the market, company size and the value effect. The research, which has been consistently repeated in markets around the world, shows that two factors - company size and value (or company health) are sources of above market average returns. We therefore expose investment portfolios to all three factors.
The research:
The Cross-Section of Expected Stock Returns
The Journal of Finance
Eugene F. Fama and Kenneth R. French
June 1992, Vol. 47, No. 2: 427-465
What the paper says: The three factors of: 1) market beta, 2) firm size & 3) value effect do the best job of explaining expected returns and are rewarded by markets with higher average returns over time.
In the author's own words: "performance versus the market or versus the next guy depends almost entirely on the amount of stocks in general, the amount of small cap stocks and/or high BtM (value) stocks you hold."
The Value Effect
Excellence Revisited
Financial Analysts Journal
Michelle Clayman
May/June 1994, Vol. 50, No. 3: 61-65
What the paper says: There is a tradeoff between growth and profitability versus valuation ratios.
In the author's own words: "Good companies do not necessarily make good investments, the market appears to reward profitable companies selling at reasonable multiples."
