Various factors—including value, yield, growth, momentum, risk and liquidity measures—have proved effective in identifying top-performing stocks. But the keys to investment success are not the same for all stocks. That is, some measures are more successful than others for certain types of stocks and certain investment styles.
A combination of growth, momentum and low earnings risk, for example, has been the best formula for success in industrial and cyclical sectors, whereas DDM valuations have been successful in the utility sector. In terms of investment style, outperforming emerging-growth stocks have been best identified by momentum measures, while outperforming momentum stocks have usually also had attractive valuations.
By weighting factors appropriately, one can create multifactor models for specific economic sectors and specific investment styles. Tests of such models suggest, however, that the added benefits are less than the benefits accruing from the original decision to use a multifactor model and the selection of an appropriate investment style. Nevertheless, sector and style-specific models may have a conceptual appeal and do provide some incremental benefits.
