The single factor that has consistently delivered excess returns over all economic cycles since 1963, is going long high quality stocks, or profitable firms, and shorting their low quality, unprofitable counterparts. And the power of the factor has not diminished. Other factors have waxed and waned.
paraphrased quote from
https://blogs.cfainstitute.org/investor/2022/01/10/fama-and-…
Similar data from portfoliovisualizer:
Dec 2000 to Dec 2020 Annualized Annualized
Factor Key Return Standard Deviation
Bet Against Beta AQR-BAB 9.4% 13.1%
Expected Growth Q-EG 4.9% 7.6%
Size AA-SMB 4.8% 10.7%
Profitability FF-RMW 3.6% 7.7%
Short Term Reversal FF-STREV 3.5% 12.5%
Quality AQR-QMJ 3.3% 9.4%
Size (FF5) FF-SMB5 3.1% 9.3%
Size Q-ME 3.0% 9.3%
Size (FF3) FF-SMB 3.0% 8.9%
Value AA-HML 2.9% 11.7%
Size AQR-SMB 2.8% 8.4%
Return on Equity Q-ROE 1.7% 10.0%
Investment FF-CMA 1.4% 6.4%
Value AQR-HML-DEV 1.2% 13.4%
Investment Q-I/A 0.9% 6.6%
Momentum AQR-MOM 0.9% 17.9%
Momentum FF-MOM -0.1% 17.7%
Quality AA-QMJ -0.6% 9.6%
Long Term Reversal FF-LTREV -1.0% 9.1%
Momentum AA-MOM -1.0% 15.5%
Value FF-HML -1.2% 10.1%
Value AQR-HML -1.2% 9.4%
Most of these factors use long-short portfolios that are market neutral, but “Bet Against Beta” overweights the long portfolio:
“A BAB factor is a portfolio that holds low-beta assets, leveraged to a beta of 1, and that shorts high-beta assets, de-leveraged to a beta of 1. For instance, the BAB factor for U.S. stocks achieves a zero beta by holding $1.4 of low-beta stocks and short-selling $0.7 of high-beta stocks.”
Q-EG uses cash from operations, change in ROE, and Tobin’s q to predict future earnings growth (cash-based profitability outperforms earnings-based profitability in forecasting returns).
FF-RMW is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expenses divided by book equity. This is similar to ROE, but maybe does not expense R&D.
---- links ----
https://www.portfoliovisualizer.com/factor-statistics
https://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstB…
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data…
Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, An Augmented q-Factor Model with Expected Growth (January 27, 2020). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3525435