Factor Alpha Newsletter
“OSAM Value” (2000 thru Oct-2017)
* The backtested results for this article are as of 10/31/17. 1
Value is the centerpiece of our investment framework and it gets built into every one of our strategies — even growth-oriented strategies. We believe that what you pay for an investment is one of the most predictive characteristics of future alpha. Also rooted in the investment philosophy is the concept of Factor Alpha — characterized by these fundamental beliefs:
- Factors drive returns. We study global market history, with an emphasis on individual stocks, to identify common themes among the most successful companies. Our unique application of Quality, Value, Momentum, and Yield factors results in unique portfolios and returns.
- What you don’t own matters. Factors should be applied from the bottom up, to build more concentrated portfolios rather than “smart” indexes.
- Discipline wins. The investment process must be consistent & repeatable.
- Risk matters. We calculate stock positions with a mindfulness of risk groups.
- Continuous research improves results. Grounded in our research of the U.S. and global markets, we seek innovative ways to continually improve our factor expertise.
It’s important to note: We don’t use themes2 in isolation. That’s because, in any given year, one factor or theme may do well or poorly, creating noise in the long-term process. Instead, we believe what’s even more helpful to investors seeking conviction-weighted, high Active Share portfolios is to use various hybrids of several multi-factor themes.
Cumulative Excess Returns:
“Cheapest Decile in Each Universe” vs. Entire Universe
(Jan. 1, 2000 thru Oct. 31, 2017)
OSAM’s “Micro Cap” Universe6
OSAM’s “Small Cap” Universe7
OSAM’s “All Cap” Universe8
OSAM’s “Large Cap” Universe9
OSAM’s “Global Large Cap” Universe10
OSAM’s “International” Universe11
OSAM’s “Canadian” Universe12
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- Portfolios for this survey 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.
- We’ve built & tested 6 proprietary themes. 3 for selecting stocks: Value, Momentum, and Yield. 3 for avoiding stocks: Earnings Quality, Earnings Growth, and Financial Strength.
- Here, we (1) follow the live-time performance of 1 multi-factor theme, or a single factor such as Dividend Yield, versus its benchmark — across various stock selection universes. Usually the format is flipped (viewed through the lens of a single Universe, theme by theme). Why Y2K? (2) Of course, data providers offer robust Momentum metrics all the way back to 1927. This Factor Alpha Newsletter’s data spans ~17 years because in our database at present that’s the longest period vetted across all 7 universes.
- Our multi-factor Value theme selects stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.
- For this survey, the vertical scale is constrained so that it’s easier to compare one chart to the next.
- We define Micro Cap as stocks with a market cap between $50M and $200M. The total market cap of the microcap space is $146B, which is about the same size as The Walt Disney Company. This means that microcaps are a scarce opportunity, which is good because larger institutional asset managers often neglect them. The typical microcap stock is only covered by 2.1 analysts on average, and many have no analyst coverage at all.
- We refer to Small Cap stocks as the universe including all stocks trading on the NYSE, AMEX, and NASDAQ with an historical inflation-adjusted market capitalization between $200 and $2B.
- 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. The stocks are equal-weighted.
- Large stocks consisting of stocks traded on U.S. exchanges with an inflation-adjusted market cap greater than average.
- Large global stocks consists of stocks with an inflation-adjusted market cap greater than average.
- Stocks have headquarters and are domiciled outside of the U.S. and Canada.
- Stocks domiciled in Canada.