Risk Premia Investing

The ideas that underlie smart beta investing are not new. Academic interest in risk premia investing and early quant investors' interest in factor portfolios helped establish the foundation for many of the ‘smart' strategies we hear about today. While there are many reasons that these risk premia exist, from simply a reflection of higher risks taken to behavioural flaws in how investors price stocks, we argue that it is the link to earnings dimensions that helps dictate the magnitude and pattern of the long-term performance of risk premia investment ideas. We believe that by understanding the link between these basic risk premia ideas, their underlying earnings dimensions, and the earnings cycle itself we can build ‘smart beta' strategies that are grounded in the real economy, not statistical backtesting of return relationships alone.