For Style Factors, One Size Does Not Fit All

Abstract

Although the proliferation of “smart beta” products using various style factors makes them seem new, many of these factors have been used in portfolio construction and risk management for decades. This article examines the historical performance of style risk factors to show that 1) their returns vary widely through time, and even those with no long-term return association can have unexpected, outsized returns at times; 2) across geographical regions, the same factor can exhibit quite different returns at the same time; and 3) an investor’s goals need to be considered when deciding which factors are appropriate to use to generate portfolio alpha.