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Strategic Factor-Based Strategies still Appear to Have the Upper Hand

In his recent contribution to, Larry Swedroe discusses the results of a recent study suggesting that investors can exploit the varied performance of Factors across business cycles. He concludes though, that "there doesn’t seem to be enough convincing evidence that a style-timing strategy can be expected to be profitable going forward". 

The recent study “Fama-French Factors and Business Cycles” examines the behavior of six Fama-French factors—market beta (MKT), size (SMB), value (HML), momentum (MOM), investment (CMA) and profitability (RMW)—across business cycles, splitting the business cycles into four separate stages: recession, early-stage recovery, late-stage recovery and very-late-stage recovery.

"Based on these findings, the authors concluded there are differences in returns across each of the economic stages, as well as around yield curve inversions, and that factors perform differently in each stage. Additionally, because of the predictive power of the yield curve, investors can exploit those differences."

Despite the authors' conclusions, Larry highlights a number of considerations that call into question the ability of investors to successfully implement such strategies. He concludes that "The bottom line is that the most prudent strategy is for investors to build portfolios that are strategically (as opposed to tactically) diversified across factors that show persistence in their premiums, have low correlation to other factors, are pervasive around the globe and across asset classes, have intuitive reasons to believe the premiums should persist (whether behavioral-based or risk-based) and are implementable (meaning they survive transaction costs).


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