2016 Factor Alpha Newsletter
“Global Large Cap”
This Global Large Cap edition of the Factor Alpha Newsletter (FAN) follows up on the 2016 All Stocks1 FAN. As before, we’ll use our proprietary multi-factor themes but with the MSCI’s All-Country World Index (MSCI ACWI)2 as a starting point.
We use this particular set of metrics to inform our “global equity income” strategy3 by showing how these themes performed in our quarterly strategy commentaries. As mentioned before, it’s important to note that we don’t use any of these themes in isolation. Instead, we use various combinations of multiple themes to build each strategy’s conviction-weighted high active share portfolio. These are the drivers of our Factor Attribution Tool (see Measuring “Factor Alpha”), which we built several years back. All factor portfolios are calculated using a compositing methodology. Monthly portfolios are created with a 12-month holding period, then the 12 monthly portfolios are combined to create the composite portfolio.
The charts below can help factor investors understand the drivers of returns both in our investment processes,4 as well as the investment returns of other managers. Here are the live-time snapshots of the past 12 months:
First, we’ll isolate the difference in performance associated with a benchmark’s market cap-weighted methodology versus an equal-weighted selection universe:
Size: “Market Cap-Weighted” less “Equal-Weighted”
(Cumulative excess returns, 1/1/16–12/31/16)
Next, the cumulative excess returns (1/1/16–12/31/16) for the top deciles5 of each theme versus the entire ACWI universe:
Stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.
Stocks with impressive and stable recent total returns.
OSAM Financial Strength
Stocks that use debt responsibly, and aren’t overly reliant on outside financing.
OSAM Earnings Quality
Stocks with strong cash flows and conservative accounting.
Stocks returning high amounts of cash to shareholders through dividends.
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- Stocks included in the Compustat Database listed on a U.S. exchange with a market value greater than $200M and a price per share greater than $1, equal-weighted.
- The ACWI is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets. The index currently includes securities from 24 countries but excludes stocks from emerging and frontier economies, making it less “worldwide” than the name suggests.
- See enhanceddividend.com to learn more about that strategy.
- We invest using factors that are driven by fundamental reasons that work over a full market cycle. But in any given year, one factor can do well or poorly, creating noise in the long-term process. We blend factors together to build proprietary multi-factor themes to help reduce the noise of any one factor, but investment themes also experience cyclical periods of underperformance.
- For example, Dividend Yield’s top decile is “the highest-yielding 10% of stocks” within the universe.