RupeeCase notes . Topic
Factors
Momentum, value, quality, size and low volatility: what each premium is, why it decays once published, and why owning the blend beats timing it.
- 22notes in this topic
- 6to read in order
- 3questions answered
01Read in this order
Six notes that carry the idea.
02Every note
22 notes, newest first.
- The edge decays when you read about itMcLean and Pontiff measured 26 percent decay out of sample and 58 percent after publication, which stretches a 0.60 Sharpe's proof time from 11 years to 59. . 11 min
- Momentum pays, then bitesMomentum's winner minus loser portfolio runs a 0.71 Sharpe since 1927 and lost about 91 percent in two months of 1932 while the market rose 82, because the crash is the short leg. . 11 min
- Dividend yield: the denominator does the workA 5 percent yield from a crashed price and one from a doubled payout look identical on a screener, and since April 2020 dividends are taxed at slab, 31.2 percent at the top. . 8 min
- The boring stock wonA dollar in the calmest US stocks grew to about 70 from 1968 to 2011 against under 8 in the wildest, and the Nifty 100 Low Volatility 30 did 17.5 against 13.7 percent over 2005 to 2020. . 10 min
- The size myth on our own shelfMidcap, Smallcap and Microcap printed 41.21, 41.03 and 40.56 percent while the Allcap basket did 48.02 with a similar worst drop, so small on its own is not an edge. . 5 min
- The turnover tax on a factorA 5.7 percent gross premium became 4.2 after trading costs, and factors traded slower than about half the book a month tend to keep a net edge. . 6 min
- Which value? The rule is the productTwo flagship value indexes on the same market share only 75 to 80 percent of their weight, and Asness and Frazzini found 3 to 3.8 points a year in one input: which price you read. . 5 min
- The asset growth factorCompanies that grew assets slowest beat the fastest expanders by around 13 percent a year over 1968 to 2003, a finding Fama and French wrote into their five factor model. . 5 min
- Factor timing is a rear view mirrorAcross ten years the prior year's leading factor repeated only three times in nine hand offs, while an equal weight blend of five earned about 10.5 percent with a worst year of minus 1.6. . 5 min
- Value and momentum: the two factors that disagreeA 50/50 blend of a 0.29 Sharpe value sleeve and a 0.50 momentum sleeve lands at 0.79, because their returns run at roughly minus 0.50 correlation. . 5 min
- Size matters, if you control your junkSmall beats large among quality stocks and among junk stocks, yet the blended small cap average trails because most small caps are junk. . 4 min
- The factor zooHou, Xue and Zhang rebuilt 452 published factors and found 65 percent failed a basic test and 82 percent failed an honest one. . 5 min
- Factor winters: the premium is pay for the droughtValue went flat to negative from 2007 to 2020 with a drawdown near 55 percent, and that discomfort is the reason the premium has not been arbitraged away. . 5 min
- The factor leg you can actually buyAcademic premiums are long short spreads; a long only fund keeps nearly all of size, about 60 percent of value and roughly half of momentum, wrapped in full market beta. . 5 min
- Last year's best factor is a bad forecastBuying the prior year's leading factor compounded to about 58 percent over five years while an equal weight blend of all five made 72, because the leader repeated once in five tries. . 5 min
- Alpha is beta in disguiseFour points of advertised alpha shrank to 0.9 after market beta, a midcap tilt and a momentum tilt were named, and those exposures rent for 0.2 percent a year. . 6 min
- Size: a regime, not a ruleBanz's 5.2 percent size premium has decayed about 71 percent since publication, and on RupeeCase's own cap curve the return barely moves while the drawdown deepens. . 5 min
- Factor crowding and decayMcLean and Pontiff found the median published anomaly kept 42 percent of its in sample alpha, which is why a brochure backtest and a live fund can sit nine points apart. . 5 min
- Multi factor stacking: the peak is at threeOn the same Nifty 200 universe, Value plus Momentum lifts Sharpe from 0.66 to 0.91, Quality adds 0.04, and the fourth and fifth factors subtract. . 5 min
- Cheap for a reason: value or trapThe cheapest Nifty 500 names split by free cash flow trend compounded at 14.6 percent and 3.2 percent over a decade, from the same doorway. . 5 min
- Quality: the factor that pays in the bear marketFour spreadsheet screens separate a quality cohort with a 7.4 percent twelve month drawdown from a junk cohort at 38.6, and recovery asymmetry does the rest. . 5 min
- Momentum factor primerMomentum means ranking on twelve months with the latest month skipped, a premium of about four points a year in India, paid out lumpy and interrupted by three crashes. . 6 min
03Go deeper
From the notes to the course, and to the cards.
04Questions, answered with figures
Three questions readers ask about factors.
What is a momentum strategy?
Rank a universe on the past twelve months with the latest month skipped, buy the top decile, hold three to six months and re rank. Over twenty years an Indian momentum cohort compounded near 17.8 percent against 13.6 for the Nifty 200 TRI, with a worst twelve month drawdown of minus 38.6 percent. Read the note: Momentum factor primer
Do factors stop working after they are published?
They shrink. McLean and Pontiff found returns 26 percent lower out of sample and 58 percent lower after publication across 97 published anomalies. Factors with a structural reason to exist survive in weakened form. Read the note: The edge decays when you read about it
Can you time which factor will lead next year?
The record says no. Over a decade the prior year's leading factor repeated only three times in nine hand offs, while an equal weight blend of five factors earned about 10.5 percent a year with a worst year of minus 1.6 percent. Read the note: Factor timing is a rear view mirror