Factors are investment characteristics that have historically produced excess risk-adjusted returns. Cyclicality results in factors experiencing periods of outperformance as well as underperformance, while low correlation means that diversification and portfolio design can be optimized to achieve superior risk-adjusted returns. Through an analysis of forward returns using market cycles, factor signal strength, and factor relative valuation, we seek to identify the most promising factors for a given market environment.
The Leuthold Factor Tilt strategy endeavors to tilt toward factors most likely to thrive under prevailing market conditions and underweight factors that which conditions are less supportive. The strategy is designed for those who believe factor alphas will be positive over time and wish to capture excess returns.
Through an in-depth analysis we identified several useful drivers of factor return. These drivers were studied under varying conditions to isolate and map the winners and losers based on alpha generation under each set of conditions. Factor drivers were then characterized under one of the broad categories consisting of: 1) Factor Metrics; 2) Economic Conditions; and, 3) Market Conditions.
Several equity factors have gained widespread acceptance by investment professionals, and our Factor Tilt strategy selects from that roster. A factor may be a standalone concept, paired with its opposite, and/or reflect a variation on a theme.
- Value and Growth
- High Quality
- Low Volatility, Minimum Volatility, and High Beta
- High Dividend Yield and Consistent Dividend Growth
- Equal Weighting and Small Cap
The portfolio will invest in a diversified basket of factor ETFs while shifting extra weight to those that appear most promising based on:
- Factor Metrics
- Economic Conditions
- Market Conditions