The Fama-French Investment Factor and Conservative Stock Portfolios

Summary

The investment factor, commonly called CMA, compares returns from diversified portfolios of firms with low and high asset growth. The described interpretation is that conservative firms, which invest less, have tended to outperform aggressive firms, which invest more. The page connects this factor to the Fama-French five-factor model, which adds investment and profitability to the earlier three-factor framework.

The proposed stock strategy sorts NYSE, Amex, and NASDAQ stocks each June into size and investment groups using NYSE breakpoints. It forms value-weighted portfolios and, within the largest size group, buys the lowest-investment stocks while shorting the highest-investment stocks. The source paper and cited research provide supporting evidence, including findings beyond the United States, but results may vary by market and period. The page notes a negative equity-market correlation as a possible diversification benefit, while recommending an independent backtest; the supplied strategy description alone does not establish current performance or hedge reliability.

Key ideas

• CMA represents the return difference between portfolios of conservative and aggressive investing firms.
• The strategy sorts stocks by size and asset growth, then trades the low-investment and high-investment portfolios within the largest size group.
• The five-factor model adds investment and profitability to the earlier Fama-French framework.
• The page describes evidence from US and international research, while leaving implementation and current performance to further testing.
• A negative market correlation is suggested as a possible diversification benefit, not a guaranteed hedge.

Tags

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