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Research reveals 4 key traits that define high-performing equity portfolios

By Rhea Nath
4 minute read

New analysis suggests equity portfolios with these characteristics will likely deliver higher returns than those tracking the Australian and global share market benchmarks.

A portfolio built using the factors of low volatility, value, momentum, and quality are more likely to deliver “significantly higher returns” over a four-decade horizon than a traditional portfolio tracking a market-capitalisation weighted index, according to Innova Asset Management.

The firm’s latest research considered multi-factor investing data against the ASX 200 and MSCI World Index, respectively. It considered value stocks (companies with low prices relative to their financial fundamentals such as earnings), quality (companies with stable earnings, low leverage and high profitability), momentum (companies with strong price trends where strong past returns are associated with strong future short-term returns), and low volatility (companies with defensive earnings and more stable share prices).

Historically, momentum stocks have been a stronger factor in the Australian share market than in many other developed countries such as the US, the research highlighted.


“Our research has found that an equity portfolio built using the four factors of momentum, quality, value, and low volatility and invested in either the Australian or global share market delivered significantly higher returns between 1982 and 2023 compared to the share market benchmarks in both markets,” Innova’s managing director and co-chief investment officer, Dan Miles, explained.

Elaborating on the research, he said these equity factors help to mitigate “substantial risks” that exist in equity portfolios due to the inherent volatility in share markets, with outperformance of 1.74 per cent for an Australian multi-factor portfolio and 1.57 per cent for a global multi-factor.

Investors keen to seek these factors are able to do so through low-cost exchange-traded funds (ETFs), Miles added, pointing out they can have management fees as low as 0.25 per cent.

“The US market is the most advanced in the world, where ETFs represent 12.7 per cent of all US equity assets compared to 4.4 per cent across the Asia-Pacific. US-focused ETFs can cover value, momentum, low volatility and quality factors, as well as many others,” he said.

Meanwhile, while the Australian market is not quite as advanced, he said there were still ETFs for many factors available.

“Investors can still create Australian equity multi-factor portfolios using a combination of ETFs and other investment structures, such as managed funds; while there may not yet be a momentum or value Australian equity ETF, there are still momentum and value managers offering factor-based investment options,” he explained.

Earlier this year, the world’s largest asset manager, BlackRock, announced the launch of three product offerings to help Australian investors access their preferred investment style in line with their broader objectives, unveiling momentum, quality, and value strategy ETFs.

In the announcement, BlackRock Australasia’s head of wealth, Chantal Giles, said the strategies would help investors capitalise on market volatility and build more resilient portfolios.

“Style investing enables investors to adjust their portfolio allocations for different points in the market cycle and can play a complementary role by providing additional portfolio diversification,” she said.

Innova’s Miles, too, highlighted that a multi-factor may require “fine-tuning” as different factors perform differently over the economic cycle.

“Innova takes an active approach to portfolio construction, rotating into and out of these factors as market conditions change. This approach increases the chances of delivering higher returns while managing the extra volatility and size of drawdowns associated with equities,” he said.