Advanced factor based equity models explained by behavioral patterns.

We exploit 3 main phenomena that we combine in various lower level models: Price Momentum, Earnings Momentum and Value. Although they have been identified by academic research many years ago, they are still observed today at a statistically significant level. While market efficiency is still subject to various debates, the patterns observed can even violate the weakest form of efficiency. The only explanations currently available are provided by the behavioralists. The phenomena mentioned hereunder are combined into so-called Dual Momentum and Optimum models, aiming at improving risk/return ratios.

Price Momentum

The Price Momentum Model mainly exploits the medium term performance continuation pattern and also factors in short term price reversion, past trading volume and volatility :

• Medium Term continuation. Discovered by Jegadeesh and Titman in 1993, this is the main phenomenon exploited by our Price Momentum model. The stocks that have outperformed during the last 12 to 3 months are the stocks that will outperform during the next 3 to 12 months. Likewise, the stocks that have underperformed during the last 12 to 3 months are the stocks that will underperform during the next 3 to 12 months. We offer country neutral and sector neutral models, using a weighted combination of historical returns specific to each country or sector.

• Short Term continuation. Discovered by Lehmann in 1990 and Jegadeesh in 1991.

• Trading Volume. Discovered in 2000 by Lee and Swaminathan.

• Volatility. We also control for other factors, such as historical volatility.

Earnings Momentum

The Earnings Momentum Model combines various earnings consensus data in order to identify earnings trends and subsequent drifts in securities prices. For example, we use the following factors at various time horizons :

• Earnings Revisions.
• Change in the level of Recommendations.
• Number of Analyst Revisions.
• Surprises to Public Events.

Relative Value

The Relative Value Model combines valuation and profitability measures translating investor skewed behaviors and agency conflicts. For example :

• Price / Free Cash Flow.
• EV / Sales.
• Return on Equity.