Three steps to identifying investment factor 'robustness'

Jason Hsu, co-founder of Research Affiliates, explores how investors can determine the most important performance and risk factors when putting together a portfolio, and ensure they have the most significance

In the thickly planted field of factors, practitioners sorely need help separating the wheat from the chaff – that is, separating the factors that can deliver on the promise of long-term outperformance from those that cannot. With over 250 purported factors from which investors can make hay, determining which are actually premium bearing could be a daunting task. We have developed a three-step process to help us and others identify factor robustness, however.  The first step in validating a factor begins with screening out all factors that have not been debated and vetted in the top-t...