There are broadly accepted five main factors — also known as premia or exposures — that have historically outperformed the market capitalisation benchmark over the long term: Value, Size, Low Volatility, Quality, and Momentum:
- Value: Over the long term, low valuation (relatively low priced) stocks have outperformed high valuation (relatively high priced) stocks.2
- Size: Small-capitalisation stocks have been shown to outperform their large-capitalisation peers over time and across many markets.3
- Low Volatility: Creating a portfolio with lower volatility or tilting towards lower risk stocks can likely generate a higher risk-adjusted return than traditional financial theory would suggest. The evidence shows that the risk/return relationship holds between asset classes, but not within the equities asset class.
- Quality: Over time, higher quality companies have been shown to outperform lower quality companies. Quality focuses on debt levels, stability of earnings and profitability.
- Momentum: Market efficiency proponents believe that stock prices have no memory but empirical evidence shows something else: stocks that have done well recently tend to carry on doing well in the near term, and stocks that have performed poorly continue to underperform.4
While different firms recognise slightly different factor lists, the factors above appear in most published lists.
In addition to this list, some firms recognise ‘Yield’ as another factor. This states that over the long-term, stocks with higher dividends tend to perform better than stocks with lower yields. This is typically linked to the Value and Quality factors.5