A Multi-Factor Model for Value–Growth Rotation and Fund-of-Funds Allocation

Summary

This report explains a value-versus-growth rotation strategy built around the idea that returns can come from deliberate exposure to style factors as well as broad market risk. It links shifts in style leadership to investor sentiment and risk appetite, differences in company earnings and valuations, and macroeconomic conditions such as growth, inflation, and liquidity. Market returns, volatility, and turnover are among the indicators used to represent the changing environment.

The strategy combines single-factor evaluations through a composite scoring approach to choose between value and growth exposures. A historical backtest from May 2012 through April 2018 reports annualized returns of 12.53%, compared with 6.11% for the CSI 300 and 5.31% for the Guozheng Growth index; the report says drawdown risk did not rise significantly. It also describes fitting style indices from actively managed funds using period-by-period return correlations, then applying the rotation model to those indices. That test reports 12.87% annualized returns and narrower maximum drawdown. These are historical results; the authors caution that model specification may be biased and past data may not predict future performance.

Key ideas

• Style returns can reflect exposure to factors such as value, growth, size, and momentum, in addition to broad market risk.
• Value–growth leadership may shift with sentiment, risk appetite, company fundamentals, valuations, and macroeconomic conditions.
• The proposed rotation model combines individual factor evaluations into a composite score.
• The report tests the model on style indices and on indices fitted from actively managed funds.
• The reported backtests are historical and may be affected by model specification bias.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.