{"id":4076,"date":"2021-12-13T14:27:32","date_gmt":"2021-12-13T13:27:32","guid":{"rendered":"https:\/\/neu.hqam.ch\/quality-top-strategies-factor-returns-or-real-alpha\/"},"modified":"2023-06-10T15:46:20","modified_gmt":"2023-06-10T13:46:20","slug":"quality-top-strategies-factor-returns-or-real-alpha","status":"publish","type":"post","link":"https:\/\/hqam.ch\/en\/quality-top-strategies-factor-returns-or-real-alpha\/","title":{"rendered":"Quality top strategies \u2013 factor returns or real alpha?"},"content":{"rendered":"\t\t
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Approaches based on modern portfolio theory (MPT) have dominated the financial industry for 60 years. Thinking in terms of factors such as value and size has deeply shaped the industry on both the provider and investor side. Institutional investors typically make their equity asset allocation decisions based on dimensions such as size, value vs. growth or quality and other factors; and the range of investment strategies offered by asset managers is typically guided by the same categories. Active management beyond factor returns (smart beta) is considered a difficult undertaking, and achieving outperformance based on publicly available information is even considered impossible. <\/p>\n

These and other insights of the modern financial industry were considered indisputable just a few years ago. Today, they are still omnipresent, but are viewed more critically. <\/p>\n

One of the challenges to MPT is a few active managers who regularly and systematically beat their benchmark. This includes the Quality approach of H\u00e9rens Quality AM with its track record of over 20 years. The ability to generate excess returns is particularly evident in concentrated Quality Top strategies. <\/p>\n

Fig.1: Performance & risk metrics of H\u00e9rens Quality Top strategies*<\/em><\/p>\n

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Source: H\u00e9rens Quality AM, MSCI, Bloomberg<\/em><\/p>\n

In this context, the question arises whether the achieved outperformance is the result of factor returns i.e. exposures to systematic risk factors, so-called smart beta, and\/or pure alpha), i.e. the result of special skills in stock selection?<\/p>\n

Quality alpha stands up to factor analysis<\/strong><\/p>\n

We investigate the issue empirically using Fama-French\u2019s 3 and 5 factor model, drawing on the 7-year track record of the Global Quality Top 8 strategy, whose approach has been described in previous issues of CEI. The Fama-French model was originally an empirical model that was not initially preceded by any economic theory. The results were only subsequently explained by risk characteristics. <\/p>\n

The following results in Table 2 show Quality Top strategies as an alpha supplier whose excess returns can only be partially explained by smart beta or investing in systematic risk factors. Here are the results in detail: <\/p>\n