Practical Applications of Factor-Based Investing: The Long-Term Evidence

Abstract

<h3>Practical Applications Summary</h3> Factor investing is popular, and its adoption is accelerating. Increasingly, investors are embracing strategies based on small or large companies, value or growth stocks, higher- or lower-yielding securities, momentum- or reversal-based strategies, or defensive or aggressive risk exposures. The key question is whether these superior returns are likely to persist in the future. To find the answer, one must assess whether factor returns have persisted over the long run and have been prevalent across different countries. In Factor-Based Investing: <i>The Long-Term Evidence</i>, <b>Elroy Dimson</b>, <b>Paul Marsh</b>, and <b>Mike Staunton</b> examine factor data for up to 23 countries going back, in some cases, more than 100 years. They report on the long-term profitability of following strategies based on market capitalization, value, momentum, dividend yield, and low-volatility investing. All five factors delivered long-run premiums across multiple countries, although they also document long intervals over which individual premiums were negative.