There is growing interest in factor and alternative risk premia investing, but investors need to understand that there is not complete agreement on definitions of terms. An investor may want to hold a specific factor yet it may be offered in different forms with different returns streams because different providers have different definitions for the factor. Academic definitions may not be the same as index provider definitions. The definitions used for a swap index from one bank will not be the same as another bank.
The quality factor as measured by Fama and French as operating profits has been described as a core factor independent of value and size. However, this is not the only way to measure firm quality. Some researchers have measured quality as return on invested capital, earnings stability and some leverage metrics.
Five different index providers define quality five different ways. Now just because it was tested one way in an academic journal articles does not mean this definition should be written in stone. There are many considerations for developing a usable product for investors, yet each choice will lead to a slightly different return pattern. Is one return pattern the true essence of equity quality? There is no agreement among practitioners or researchers. Quality may have more than one attribute and those attributes may be weighed or ranked to form a better quality measure. The above table is from https://www.financial-planning.com/news/factors-are-remaking-asset-allocation. There is commonality with return on equity and return on assets; however, there are also other criteria that can further differentiate firms for ranking.
What this means is that a buyer should careful of his product choice. An investor can buy a quality factor portfolio and find he is under-performing against a few quality benchmarks. Just like there are degrees of "organic" food for consumers, there are various measures for factors.
Five different index providers define quality five different ways. Now just because it was tested one way in an academic journal articles does not mean this definition should be written in stone. There are many considerations for developing a usable product for investors, yet each choice will lead to a slightly different return pattern. Is one return pattern the true essence of equity quality? There is no agreement among practitioners or researchers. Quality may have more than one attribute and those attributes may be weighed or ranked to form a better quality measure. The above table is from https://www.financial-planning.com/news/factors-are-remaking-asset-allocation. There is commonality with return on equity and return on assets; however, there are also other criteria that can further differentiate firms for ranking.
What this means is that a buyer should careful of his product choice. An investor can buy a quality factor portfolio and find he is under-performing against a few quality benchmarks. Just like there are degrees of "organic" food for consumers, there are various measures for factors.
No comments:
Post a Comment