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Adding value with a rules-based model

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While it’s true that an alarming majority of investment managers fail to outperform major indices over rolling 10-year periods, there is still a meaningful percentage of active managers who have demonstrated the ability to generate outperformance over time.

How did they do it? The vast majority of these are likely to be rules-based managers who are applying a systematic, quantitative investing approach to their portfolios. And while accepting the reality of a rules-based model demands humility, if you’re an active manager with the goal of adding the greatest possible value to every client relationship, it’s a leap you would be wise to take. If you need any further convincing, just look at the numbers.

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You already know that O’Shaughnessy’s research showed that quantitative factors have historically had a positive impact on returns. Going one step further, the research also showed that of the three key factors—Value, Growth, and Momentum—the factor that demonstrated the greatest rate of long-term success was Momentum. A recent white paper published by RBC Capital Markets supports those results, showing that Momentum outperformed the S&P 500 in every decade since the 1930s. And while both Value and Growth experienced decades of underperformance in that period, Momentum outperformed in every single decade.

As an active manager, your primary goals are to outperform the benchmarks and, as a result, to deliver the highest possible value to your clients. The data is clear that a rules-based approach that leverages Momentum as a driving factor is the most promising approach available to achieve those goals. Are you ready to make the leap?

Sure, the shift to rules-based investing can be challenging, especially if you’ve built your business on a foundation of traditional, subjective investment management. But with 80 years of data showing the effectiveness of a consistent, quantitative, factor-based approach—and knowing that subjective human behavior can be the biggest drag on performance over time—suddenly that leap doesn’t look quite so daunting after all.

To learn more about the value of quantitative investing, read the research paper Man vs. Machine: Dissecting the Real Value of a Quantitative Investing Model.

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