Whether constructing a fundamental factor model, a value strategy or a value index, valuation ratios need context. Time-series and cross-sectional approaches each have pros and cons. But combining the two may have presented a clearer picture. 

Selecting an equity benchmark may mean balancing market coverage and investability. For example, exhaustive coverage may include microcap stocks, with lower liquidity and investment capacity. But excluding them may reduce low-size-premium exposure.

Value has historically outperformed in economic recoveries. With the reopening of the global economy we examined value’s performance against other factors, and exposures from our adaptive multi-factor model at the end of Q1. 

After 15 years of challenging performance, many have asked if value is still a valid investment strategy. But the reopening of the global economy following vaccination rollouts has reignited interest across stocks, sectors, countries and regions.

It is not etched in stone that relationships between factor exposures and returns must be linear. We found machine-learning algorithms could identify nonlinear relationships and be used to construct a factor showing significant explanatory power. 

Despite a recent performance lift, many still ask whether the value factor is broken. We analyze the reasons behind its underperformance and start exploring the potential of updates to value definitions and approaches to value-portfolio construction.