Investing with Style

Value, momentum, carry, and defensive. Those are the four investment “styles” that have uniquely held up across a multitude of asset classes, markets, and time periods using very liquid securities and form the core foundation for explaining the cross-section of returns in most asset classes.

Tobias “Toby” Moskowitz, Professor of Finance and Economics Yale University, visited Swedish House of Finance on March 19 to present his research on these investment strategies and discuss the evidence based on a century of data.

Investors are bombarded by a variety of investment strategies from a growing and increasingly complex financial industry, each claiming to improve returns and reduce risk. Amid the clamor, academic research has sifted through the vast landscape and found four intuitive investment strategies that, when applied effectively, have delivered positive long-term returns with low correlation to each other and traditional markets.

 

Questions that Toby Moskowitz are addressing with his research include:

– Are styles just data mined or over-fitted to a specific sample?

– If the styles exist, are they behavioral? Are they risk-based?

– Do style returns depend on macroeconomic conditions?

– Can you time the styles?

– Has the alpha of the styles decayed over time?

 

A question that Toby Moskowitz often receives is how the styles behave during crises. Here, the data showed that styles perform equally well in bull and bear markets. Looking ahead – an area that Toby Moskowitz is planning to research further is the question of the effect of trading costs. One major obstacle in this area is getting access to detailed data to enable proper research.

 

Discussant: Kerstin Hessius, CEO of the Third Swedish National Pension Fund (AP3).

 

The meeting is moderated by Pehr Wissén, Senior Adviser at the Swedish House of Finance, Stockholm School of Economics.