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Paper:Our goal in this paper was to pick apart the two most common and simple factor approaches, Value and Momentum, defined in terms of the earnings yield and the 6-month trailing return, respectively. In future pieces, we intend to use our new toolkit to illustrate the many ways in which their underlying signals can be improved, in ways that we’ve been using in live portfolios for more than 20 years. Examples of the kinds of improvements that are possible include: refining the definitions of the factors, using quality screens to avoid companies with poor “holding” growth, and selecting for companies with disciplined capital allocation practices via shareholder yield and other factors. We will also continue to explore the effects that portfolio concentration, risk management, and rebalancing have on factor strategies through time.
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