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Factor Investing - Empowering investors to achieve better outcomes
Factor Investing - Empowering investors to achieve better outcomes
Factors are often key drivers of portfolio returns – Factor Investing is now mainstream and being embedded throughout the investment process.
MSCI helps clients build, implement and measure factor based strategies through consistent and transparent factor frameworks.
- MSCI has been a leader in the application of factors for 40+ years
- MSCI, beginning with Barra, invented a common language to explain risk and return through the lens of factors
- “By 1976 Barra (now part of MSCI) had created sophisticated models that predicted stock returns based on many different risk factors” – Bionic Beta wins the 1970’s (Forbes, Feb 2014)
- “By 1976 Barra (now part of MSCI) had created sophisticated models that predicted stock returns based on many different risk factors” – Bionic Beta wins the 1970’s (Forbes, Feb 2014)
Explore the MSCI Global Factor Framework interactive below which provides transparency in to our Global Equity Factor Model – Long Term Horizon (GEMLT):
MSCI Graphics
Momentum
Explains common variation in stock returns based on their performance over the trailing 12 months
Relative Strength
Non-lagged Relative Strength is first computed from the returns from the trailing 252 days
Historical Alpha
Non-lagged values of historical alpha are computed by the time-series regression
Dividend Yield
Captures differences in stock returns attributable to stock's trailing 12-month and predicted dividend-to-price ratios
Reported Dividend-
to-Price
Dividing the trailing 12-month dividend per share by the price at the last month end
Forecast Dividend-
to-Price
Dividing the 12-month forward-looking dividend per share (DPS) by the
current price
Leverage
Captures common variation in stock returns due to differences in the level of company leverage
Investment Quality
Combination of measures that capture common variation in stock returns of companies experiencing rapid growth or contraction
Earnings Variability
Explains stock return differences due to variability in earnings and cash flows
Earnings Quality
Explains stock return differences due to uncertainty around company operating fundamentals and accrual components of earnings
Profitability
Combination of profitability measures that characterizes efficiency of a firm's
operations and total activities
Debt-to-Assets
Current liabilities plus long-term debt divided by book value of total assets
Book Leverage
Book Value of Common Equity: Book value of preferred equity and book value of long-term debt
Market Leverage
Market Value of Common Equity: Book value of preferred equity and book value of long-term debt
Asset Growth
Annual reported company assets are regressed against time over the past five fiscal years
Capital Expenditure Growth
Annual reported company capital expenditures are regressed against time over the past five fiscal years
Issuance Growth
Annual reported company number of shares outstanding regressed against time over the past five fiscal years
Variability in Sales
Standard deviation of company reported annual sales of the last five fiscal years, divided by the average annual sales
Variability in Earnings
Standard deviation of company reported annual earnings over the last five fiscal years, divided by the average
annual earnings
Variability in Cash Flow
Standard deviation of company annual cash flows of the last five fiscal years, divided by the average annual cash flow
Variation in Predicted EPS
Dividing the standard deviation of 12-month forward-looking earnings per share (EPS) estimates by the current price
Cash Earnings to Earnings
Difference between cash-earnings-to-price and earnings-to-price
Accruals - Balance Sheet Statement
Change in current assets net of cash, and less change in current liabilities net of short-term debt, less depreciation, standardized by total assets
Accruals C/F - Statement
Negative change in accounts receivable, inventories, accounts payable, accrued taxes, and other current assets/liabilities, less depreciation, standardized
by total assets
Asset Turnover
Sales divided by total assets
Profitability
Sales minus cost of goods sold divided by total assets
Gross Margin
Sales minus cost of goods sold divided by sales
Return on Assets
Earnings divided by total assets
Liquidity
Captures common variations in stock returns due to the amount of relative trading and differences in the impact of trading on stock returns
Monthly Share Turnover
Log of the share turnover over
the previous month
Quarterly Share Turnover
Log of the share turnover over
the previous quarter
Annual Share Turnover
Log of the share turnover over
the previous year
Annualized Traded Value Ratio
Daily traded value ratio (DTVR) is the volume divided by the number of shares
Residual Volatility
Captures relative volatility in stock returns. Consists of three descriptors: volatility of daily excess returns, volatility of daily residual returns, and cumulative range of the stock over the last 12 months
Beta
Explains common variations in stock returns due to different stock sensitivities to market or systematic risk that cannot be explained by the World factor
Historical Sigma
Volatility of the residual returns from historical
beta regression
Daily Standard Deviation
Volatility of excess returns over past year
Cumulative Range
Cumulative excess log return over past specified months
Historical Beta
Slope coefficient from a time-series regression of stock excess returns, against the cap-weighted
excess returns
Growth
Measures company growth prospects using sales growth and earnings growth over trailing five years and predicted earnings growth
Sales per Share Growth Rate
Annual reported sales per share are regressed against time over the past five fiscal years
Earnings per Share Growth Rate
Annual reported earnings per share are regressed against time over the past five fiscal years
Predicted Long-term Growth
Long-term (3-5 years) earnings growth forecasted by analysts
Book-to-Price
Calculated as the last reported book value of common equity divided by current market capitalization
Earnings Yield
Describes stock return differences due to various ratios of the company's earnings relative to its price
Long-Term Reversal
Explains common variation in returns related to a long-term (five years ex. recent thirteen months) stock price behavior
Book-to-Price
Last reported book value of common equity divided by current market capitalization
Reported Earnings-to-Price
Dividing the trailing 12-month earnings by the current market capitalization
Analyst-Predicted Earnings-to-Price
Dividing the 12-month forward-looking earnings by the current
market capitalization
Cash Earnings-to-Price
Dividing the cash earnings of the previous fiscal year by the current
market capitalization
Enterprise Multiple (EBITDA to EV)
Dividing the earnings before interest and taxes of the previous fiscal year by the current enterprise value (EV)
Long-Term Relative Strength
Returns analyzed from the trailing
four years
Long-Term Historical Alpha
Returns analyzed as the intercept term from a CAPM regression over the past four years
Mid Capitalization
Captures the payoff to the Size factor across the market-cap spectrum
Size
Captures the return differences between large-cap stocks and small-cap stocks
Cube of Size
Standardized Size exposure (log of market capitalization) is cubed following orthogonalized, winsorized and standardized
Log of Market Capitalization
Natural logarithm of market capitalization
Momentum
Momentum
Explains common variation in stock returns based on their performance over the trailing 12 months
Relative
Strength
Non-lagged Relative Strength is first computed from the returns from the trailing 252 days
Historical
Alpha
Non-lagged values of historical alpha are computed by the time-series regression
Yield
Dividend Yield
Captures differences in stock returns attributable to stock's trailing 12-month and predicted dividend-to-price ratios
Reported
Dividend-
to-Price
Dividing the trailing 12-month dividend per share by the price at the last month end
Forecast
Dividend-
to-Price
Dividing the 12-month forward-looking dividend per share (DPS) by the
current price
Quality
Leverage
Captures common variation in stock returns due to differences in the level of company leverage
Investment
Quality
Combination of measures that capture common variation in stock returns of companies experiencing rapid growth or contraction
Earnings
Variability
Explains stock return differences due to variability in earnings and cash flows
Earnings
Quality
Explains stock return differences due to uncertainty around company operating fundamentals and accrual components of earnings
Profitability
Combination of profitability measures that characterizes efficiency of a firm's
operations and total activities
Debt-to-Assets
Current liabilities plus long-term debt divided by book value of total assets
Book
Leverage
Book Value of Common Equity: Book value of preferred equity and book value of long-term debt
Market
Leverage
Market Value of Common Equity: Book value of preferred equity and book value of long-term debt
Asset Growth
Annual reported company assets are regressed against time over the past five fiscal years
Capital
Expenditure
Growth
Annual reported company capital expenditures are regressed against time over the past five fiscal years
Issuance
Growth
Annual reported company number of shares outstanding regressed against time over the past five fiscal years
Variability
in Sales
Standard deviation of company reported annual sales of the last five fiscal years, divided by the average annual sales
Variability
in Earnings
Standard deviation of company reported annual earnings over the last five fiscal years, divided by the average
annual earnings
Variability
in Cash Flow
Standard deviation of company annual cash flows of the last five fiscal years, divided by the average annual cash flow
Variation
in Predicted EPS
Dividing the standard deviation of 12-month forward-looking earnings per share (EPS) estimates by the current price
Cash Earnings to Earnings
Difference between cash-earnings-to-price and earnings-to-price
Accruals -
Balance
Sheet
Statement
Change in current assets net of cash, and less change in current liabilities net of short-term debt, less depreciation, standardized by total assets
Accruals -
Cash Flow
Statement
Negative change in accounts receivable, inventories, accounts payable, accrued taxes, and other current assets/liabilities, less depreciation, standardized
by total assets
Asset
Turnover
Sales divided by total assets
Profitability
Sales minus cost of goods sold divided by total assets
Gross Margin
Sales minus cost of goods sold divided by sales
Return
on Assets
Earnings divided by total assets
Liquidity
Liquidity
Captures common variations in stock returns due to the amount of relative trading and differences in the impact of trading on stock returns
Monthly Share
Turnover
Log of the share turnover over
the previous month
Quarterly
Share
Turnover
Log of the share turnover over
the previous quarter
Annual Share
Turnover
Log of the share turnover over
the previous year
Annualized
Traded Value
Ratio
Daily traded value ratio (DTVR) is the volume divided by the number of shares
Volatility
Residual
Volatility
Captures relative volatility in stock returns. Consists of three descriptors: volatility of daily excess returns, volatility of daily residual returns, and cumulative range of the stock over the last 12 months
Beta
Explains common variations in stock returns due to different stock sensitivities to market or systematic risk that cannot be explained by the World factor
Historical Sigma
Volatility of the residual returns from historical
beta regression
Daily
Standard
Deviation
Volatility of excess returns over past year
Cumulative
Range
Cumulative excess log return over past specified months
Historical Beta
Slope coefficient from a time-series regression of stock excess returns, against the cap-weighted
excess returns
Growth
Growth
Measures company growth prospects using sales growth and earnings growth over trailing five years and predicted earnings growth
Sales per Share
Growth Rate
Annual reported sales per share are regressed against time over the past five fiscal years
Earnings
per Share
Growth Rate
Annual reported earnings per share are regressed against time over the past five fiscal years
Predicted
Long-term
Growth
Long-term (3-5 years) earnings growth forecasted by analysts
Value
Book-to-Price
Calculated as the last reported book value of common equity divided by current market capitalization
Earnings
Yield
Describes stock return differences due to various ratios of the company's earnings relative to its price
Long-Term
Reversal
Explains common variation in returns related to a long-term (five years ex. recent thirteen months) stock price behavior
Book-to-Price
Last reported book value of common equity divided by current market capitalization
Reported
Earnings-
to-Price
Dividing the trailing 12-month earnings by the current market capitalization
Analyst-
Predicted
Earnings-
to-Price
Dividing the 12-month forward-looking earnings by the current
market capitalization
Cash
Earnings-
to-Price
Dividing the cash earnings of the previous fiscal year by the current
market capitalization
Enterprise
Multiple
(EBITDA to EV)
Dividing the earnings before interest and taxes of the previous fiscal year by the current enterprise value (EV)
Long-Term
Relative
Strength
Returns analyzed from the trailing
four years
Long-Term
Historical
Alpha
Returns analyzed as the intercept term from a CAPM regression over the past four years
Size
Mid
Capitalization
Captures the payoff to the Size factor across the market-cap spectrum
Size
Captures the return differences between large-cap stocks and small-cap stocks
Cube of Size
Standardized Size exposure (log of market capitalization) is cubed following orthogonalized, winsorized and standardized
Log of Market Capitalization
Natural logarithm of market capitalization
Our Research differentiates MSCI from the rest
Our Research differentiates MSCI from the rest
One of MSCI’s key competitive advantages is our research. We employ one of the largest research teams in our industry – which contains extensive academic credentials with broad financial and investment industry experience. We are dedicated to building the world’s finest index, portfolio construction and risk management tools – working on both developing new factor models and methodologies and enhancing existing ones.
MSCI‘s rich factor hierarchy is built from the ground-up from aggregated fundamental and technical data. This is based on extensive research to identify common drivers of risk and return and back tested for relevance across markets and investment strategies. Our in-house team of more than 150 researchers blends academic research with practical experience and is continuously innovating to introduce new factors into risk models.