Quality Factor Downgraded as Economy Recovers

Proponents of factor investing claim investors should not attempt to time factors but should instead hold them constantly to collect the risk premium. However, Charles points out these premia are not earned evenly over time and so in practice, timing them Is necessary. In this note, he adapts ASR’s signature 5 pillar framework for evaluating Equities (macro environment, valuation, earnings growth, sentiment and risk liquidity, and trend momentum) to the six Equity factors (Value, Growth, Quality, Low Volatility, Momentum, and Size). This framework is more so qualitative than quantitative, but this approach is similar to using an ensemble method of weak learners in machine learning. Charles concludes that the Quality factor, a defensive factor which performs when the economy weakens, is no longer so advantageous as poor-quality companies increase their profitability. He remains positive on Value, favoring cheap stocks, and on Size, favoring smaller market cap stocks.