Why Stable Factors are Hard to Time

Factor timing has become a topic for vigorous debate in the investment community. In his recent paper (2016)[1], Asness shared his thoughts as to why industry professionals find it difficult to argue in favour of factor timing models. We demonstrate that typical equity risk premia (such as ‘Value’, ‘Momentum’ or ‘Quality’), are very difficult to time due to the way they were originally created to have a high ‘hit rate’ and drift. As a result, typical factors have insufficient time variation and are best deployed in a buy-and-hold diversified portfolio with no attempts at timing. Future views on factor investing should explore avenues like contextual modelling to better improve the client experience. Finally, we emphasise that increasingly, factor research is not a passive activity; it requires careful active investment management and advice.