In their quest for new ways to generate alpha, investors continue to pump cash into factor and quantitative-based strategies. Quant Investing–Bridging the Divide,1 an article that explores the trend, says the pool of assets in these strategies has surged to US$1.5 trillion and is growing at a rate of 17% annually. Applied Equity Advisors have been adherents of factor-based investing for 15 years, but we find it works best when supplemented with traditional stock selection.
Investors are embracing factor-based and quantitative approaches because they have delivered excess returns. Research shows that, over the past 20 years, broad market factors—such as valuation, growth, quality and momentum—have driven about 65% of a global equity manager's relative returns.2