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References to the 'momentum factor' appear as early as 1913, but the drivers of this factor stretch back even further. Investors focusing on buying quality companies at cheap valuations with strong earnings have benefited from the momentum effect for centuries.
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Our analysis of corporate allocation over several decades finds that the most rewarding way to allocate capital is by returning it to shareholders. In fact, investors have recognized this for more than four centuries, and demanded buybacks and dividends as a result.
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While they may not have been known by the same names, many modern investment factors have historical roots stretching back centuries. This series, The Factor Archives, provides historical context on the six factor themes underlying OSAM’s investment process.
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Listen to Jamie discuss this paper on the “What Works on Wall Street Podcast”
 
In order to scale, the largest ESG products are designed to be one size fits all. This approach waters down and often tilts away from the values investors (institutional or individual) want. Poorly defined ESG screens and tilts can lead to starting universes and portfolio holdings that are not aligned with investors’ goals. We believe the best solutions are reached by tailoring portfolios to the unique goals of each investor. This paper discusses best practices in: tailoring ESG screens and tilts, combining ESG with Alpha factors to improve return expectations, and using differences in ESG data providers to solve a wider range of ESG goals.
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Listen to Travis Fairchild discuss ESG on the What Works On Wall Street Podcast.
 
In this quarter’s letter, Patrick begins by highlighting the most interesting trend we see inside equity markets today, and finishes by sharing the five key lessons that we’ve learned so far after demoing Canvas for more than 100 advisors and other capital allocators.
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At OSAM we focus on Shareholder Yield to build differentiated, alpha-focused strategies in the “efficient” US Large Cap universe. Shareholder Yield is the sum of a stock’s dividend yield (paid over previous twelve months minus special dividends) and the percentage of net share buybacks over the previous twelve months. It is a powerful tool for identifying good management teams. Our approach aims to capture the benefits of both dividends and buybacks to drive positive returns for investors.
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In this article, we will look at another way to build models that can describe non-linear relationships. While very different from the ensembles of decision trees that we saw last time, these new models also generalize linear regression and should be easy to incorporate into your modeling process.
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Re-Read ML & Investing Part 1: From Linear Regression to Ensembles of Decision Stumps
 
OSAM CEO Patrick O’Shaughnessy recently sat down for an in-depth discussion on Canvas with Phil Huber, Chief Investment Officer at Huber Financial. Huber was an early Canvas partner and understands the power of customized portfolio management. In a recent article he included the following Q & A with Patrick. This Q & A serves as a valuable resource for how we think of the Canvas Platform.
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Read more on Phil Huber's blog, bps and pieces
 
Today, I am excited to announce the release of Canvas, the first investing software that allows advisers and allocators to design, implement, and maintain deeply customized investment strategies. Building on OSAM’s 2+ decades of expertise in factor and systematic strategy design, Canvas hands allocators the keys to our best systems so they can design tailored strategies for their clients. Give your clients something they cannot find elsewhere—a strategy built uniquely for them.
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In this piece we analyze an innovation metric, Granted Patents, from a factor investing approach and show that this metric is indicative of both fundamental earnings growth and future stock performance. In combination with capitalized Research and Development expense, a more readily available innovation metric found today, we can further identify high-innovation companies that provide a differentiated source of excess returns and growth. Innovation metrics can aid quantitative Value investors in detecting mispricings caused by overly pessimistic expectations as cheap, high innovation companies show greater earnings resilience while benefiting from future, upward re-pricing.
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Value has underperformed since the beginning of 2007, leading some to think Value investing is dead. This paper takes a long look through market history and found another extended period from 1926 to 1941 where Growth outperformed Value, and offers a theory for the connection between the two periods and why the underperformance may be episodic.
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Read coverage of this whitepaper in the WSJ Listen to Chris Meredith discuss this whitepaper on Bloomberg's "Odd Lots" podcast
 
In this piece, Jesse Livermore+ introduces a new methodology for measuring the profitability and valuation of corporations. In applying the methodology, he encounters a massive discrepancy in corporate capital allocation. To explain the discrepancy, he attempts to show that reported company earnings are systematically overstated relative to reality. After identifying the likely causes of the overstatement, he explores their implications for individual stock selection and overall stock market valuation.
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Executive Summary by Patrick O'Shaughnessy Watch Patrick O'Shaughnessy's interview on Bloomberg
 
A rare instance of OSAM CEO Patrick O’Shaughnessy appearing as a podcast guest. In this inaugural episode of “First Meeting with Ted Seides”, the conversation focuses on Patrick’s career in the world of investing, and O’Shaughnessy’s differentiated approach to factor investing, portfolio construction, and more.
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Few modern professions have lasted as long as the financial adviser, which archaeological evidence in Mesopotamia dates to at least the third millennium BCE. How has this profession lasted so long? The industry’s longevity is largely attributable to financial technology (FinTech), which has historically empowered advisers to better serve their clients.
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Watch Jamie Catherwood's interview on Bloomberg
 
In this quarter’s letter, Patrick discusses two examples of how we are trying to build accumulating advantages at OSAM. First, by adding to our “research graveyard,” and second by building a web of interconnected software-based tools.
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In this quarter’s letter, we address the most common questions that we field at OSAM by discussing:

I. 2018 performance
II. Whether the market looks attractive as of January 2019
III. Factor performance during 2018 (which started fine and ended very badly)
IV. Our vision for the long-term future of OSAM.
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The idea of applying machine learning to finance and investing has become a popular topic of discussion recently, and for good reason. As its use becomes widespread, machine learning (ML) has the potential to change almost every part of society, both by automating routine activities and by improving performance in difficult activities. In all likelihood, investing will be no exception.
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In Factors from Scratch, we showed that value investing works through a re-rating process. The process begins when the market develops an expectation that the earnings of certain companies will decline or grow at depressed rates into the future. The market then prices those companies at a discount relative to their current earnings, turning them into "value stocks." Over the short-term, the market usually ends up being right in its expectations: value stocks usually do go on to experience declines or slowdowns in their earnings, particularly in comparison with the rest of the market. But over the long-term, they usually recover and return to normal growth. When the market prices value stocks, it tends to underestimate the likelihood and extent of their eventual recoveries.
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In this quarter’s letter, we describe the more interesting, next stage of factor investing: alpha within factors. This simple idea describes what we’ve pursued at OSAM over the years, and what we continue to pursue through our research agenda today.
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We are excited to announce our second OSAM Research Partner and our search for more partners with some very specific skills.
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In this quarter's letter, we're going to share our thoughts on three key topics: the Value factor’s extended run of
poor performance, the ways we believe asset managers can borrow concepts from the technology sector, and our
current research agenda.
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The excess returns associated with Value and Momentum result from convergent and divergent processes, respectively. Value stocks are systematically underpriced and gradually converge on their fair value over time. Momentum stocks start out fairly valued or slightly overvalued, and go on to become more overvalued in the short-term, before reverting back. Both styles represent a market mistake that can be captured as alpha. In this piece, we're going to make all of these points more clear through a unified framework that we've developed to explain how factors work.
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Today we are announcing a new initiative: the OSAM Research Partners Program. Through the program, we will begin building formal relationships with the brightest and most curious people we can find to produce new research for the benefit of our investors and the broader community.
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Few professional managers understand the power of portfolio construction, fewer still can quantify the impact on performance. While students of markets are inundated with knowledge on investment selection, an understanding of portfolio construction is woefully inadequate. To understand how impactful, we need new frameworks that differentiate between skill in construction versus selection.
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The price-to-book ratio has a problem. Accounting distortions are causing record numbers of U.S. companies to report negative book value and more and more cheap companies to be defined as expensive growth companies (Veiled Value Stocks).
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Anyone overweight to non-U.S. allocations has suffered over the previous ten years. The current equity bull market has not been kind to non-U.S. allocations. The dramatic outperformance of U.S. stocks on the global equity stage has confounded allocators waiting for a turn, but history suggests these cycles are normal and revert over time.
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We highlight an alternative to private equity: microcap equities. While private equity offers potential advantages, it also requires taking distinct risks. In this paper, learn how microcap equities can help mitigate these risks and also provide strong performance by using proven themes for stock selection.
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“Traditional” asset allocation favors capacity-based frameworks that are overly-reliant on flawed market cap-weighted indexes. Also, that approach fails to make adjustments for investor risk tolerance or plan size. Investors who use a returns-based approach instead — adding Micro and Small Cap into the equities mix — can expect to see stronger returns and lower volatility.
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Many investors readily agree that alpha is scarce. It is hard to find, highly sought after, and requires skill to extract. The eclectic microcap universe provides a disparate group of continually evolving and devolving businesses with structural features that remain persistently attractive for investors.
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As the number of factor products increase, it’s important to understand how different portfolio construction methods can lead to very different investment results, even when using the same factors.
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While factor investing has caught on in public equity markets, it has been largely overlooked in real estate investing. Yet our research shows the public real estate market is a uniquely inefficient, and fertile ground for active, factor-based investing. Factor investing in REITs has a proven track record, in this paper, read how any allocation can benefit from this unique approach to REITs, whether used to increase liquidity, increase access, or broaden the list of real estate opportunities.
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OSAM Research Director Chris Meredith, CFA challenges and dispels the notion that investment factors are commodities. Factors that some view as generic are nuanced both in their definitions and implementation.
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Chris Meredith, OSAM's Director of Research & Portfolio Management, and Portfolio Manager Patrick O'Shaughnessy highlight an alternative to private equity: microcap equities. Private equity has become a central component of many institutional and high-net-worth investment portfolios over the past decade. But, while private equity offers potential advantages, it also requires taking distinct risks. In this paper, learn how microcap equities can help mitigate these risks and also provide strong performance by using proven themes for stock selection.
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Has an increase in shareholder transactions (primarily share repurchases) contributed to how price-to-book has gradually become ineffectual in recent years?
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This paper offers an examination of stocks with strong buybacks, trying to determine if they are thriving because of earnings or stock manipulation.
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The first part of 2016 has been one of the most difficult time periods for active management on record. To shed light on this challenging period we explore the profile of the stocks which have led the Russell 1000® benchmarks. Characteristics that historically do poorly are leading the market over this period. Further, the gap of value over growth indices so far this year is more a surge in stocks with terrible sales and earnings growth, and less a triumph of traditional cheap over expensive.
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Does the economic cycle have any bearing on investment success? Macro investment houses have constructed intricate frameworks to understand the “economic machine,” but economic data are notoriously prone to revisions, lags, and adjustments in measurement through time—none of which are suitable for timely and reliable investment signals. As factor investors, we believe that certain fundamental characteristics—not economic variables—drive stock returns. We’ve distilled the hundreds of investment factors into cohesive multi-factor themes that can serve as foundational building blocks for equity strategies. Among the litmus tests for those themes is persistence. This paper identifies investment themes that deliver persistent outperformance in multiple different economic environments.
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Read how to build investment strategies for alpha, not scale—and why we believe the asset management industry has gone in the opposite direction.
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Read why the Canadian market deserves consideration as a dedicated piece of an investor’s overall asset allocation. Canadian equities have a long history, dating back to 1861, and today it ranks as the world’s fourth largest stock market by market capitalization. Over the period from 1900 to 2014, adjusted for inflation, Canadian equities have returned 5.8 percent annualized, which compares favorably to the U.K’s return of 5.3 percent and slightly lags the U.S. return of 6.5 percent (see also “The Dangers of Indexing in Canada” linked below).
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Is there an undiscovered market where valuations are not systematically picked apart by Wall Street analysts, where huge changes in valuation often go unnoticed, and a stock’s price is very much at odds with its true value? Read this paper to learn more about the opportunity for consistent, long-term excess returns that awaits investors in the overlooked, undervalued and unappreciated, and uniquely-positioned microcap space.
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The Canadian market gets little attention and is rarely a dedicated piece of an overall asset allocation outside of Canada. However, for the past two decades, it has been one of the most consistent-performing developed markets in the world. Investing in Canada via market cap-weighted indexes can introduce unnecessary risks. This paper shows how active management can give investors an edge in the Canada market.
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Active management has two potential advantages versus an index. The first advantage is the one that most people think of: active stock selection. But this paper focuses instead on the second potential advantage: active stock elimination, or identifying stocks not to own in the portfolio. While owning strong performers is the most obvious source of excess returns versus a benchmark, the stocks that are in an index but not in an active portfolio often explain as much of the active portfolio’s relative returns.
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Much has been written on the role that buybacks can play in the overall market and whether or not they are implemented with the interests of investors under consideration. This paper focuses on (1) the pre-disposition of companies with high conviction in their own buyback programs to outperform the majority of companies engaged in low conviction buybacks and (2) how investors can use this to their advantage.
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With widespread inefficiencies and a greater dispersion of returns, the small cap space calls for an active management approach. This commentary, redefining inefficiency as opportunity, identifies the significant potentials for excess return in small cap equities and serves as a guide to navigate this often-overlooked area of the market. Read this whitepaper to learn how our disciplined, multi-factor strategy offers an alternative to traditional qualitative stock-picking methods.
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One effective strategy in the U.S. over the past several decades has been to buy stocks that are in the midst of repurchasing significant quantities of their shares—but just blindly following buybacks isn’t always a good strategy. This paper outlines a very brief history of buybacks, explores the reasons (good and bad) that companies buy back stock, and explains the huge advantage available to investors who incorporate buybacks into a total “shareholder yield” calculation to be used in their investment strategy, while at the same time avoiding companies that are buying back shares for the wrong reasons.
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Equity investing in the Canadian market poses unique liquidity and alpha capture challenges. Systematic stock selection based on multi-factor composites for value and momentum strikes a balance between absolute return, risk-adjusted return, and persistence of alpha in the most liquid part of the market. OSAM’s portfolio construction process balances alpha generation with market impact costs. This paper articulates the themes of value and momentum in stock selection and demonstrates their potential to result in significant long-term outperformance of Canadian benchmarks.
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Canadian equity indexes based on market-cap-weighted constructions are structurally flawed and result in unforeseen concentration risks. Systematically buying stocks based on their valuations and market momentum has proven to be an effective way of beating market-cap-weighted indexes in markets around the world. These two themes work especially well in the Canadian equity market. This paper outlines why these two themes work so well in Canada, and how to use them to build an investment strategy.
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Should investors pay higher fees to active managers in an attempt to beat the market? Or should they instead buy cheap passive index funds or exchange traded funds (ETFs)? The choice between the passive or active approach to investing can have a huge impact on long-term results. In this paper, we evaluate the arguments for each style, and argue for an approach that combines the strengths of both the passive and active approaches.
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Investor appetite for high-yielding companies continues to grow. However, there are those who believe high dividend payments are a poor indicator of a company’s future growth prospects and prefer to select stocks using “dividend growth” instead. Our research suggests that investors should focus on dividend yield rather than dividend growth rates.
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Though U.S. stocks with high dividend yields have become very popular with individual and professional investors, OSAM makes the case for shareholder yield, a factor the Research Team has long advocated, which has provided strong returns for U.S. stocks for more than 80 years. Shareholder yield is the sum of a company’s dividend yield plus its buyback yield (the percentage of shares outstanding that have been repurchased or issued over the last year).
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As guest contributors to The Street, Jim and Patrick O'Shaughnessy discuss how the fourth edition of What Works on Wall Street can reveal ways to improve return and reduce volatility.
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Jim O’Shaughnessy looks at historical returns for stocks and bonds in various inflationary environments, and what investors might expect going forward.
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In the face of so much grim economic news and uncertainty about the future, the OSAM Research Team reviews the historical implications of low economic growth, high unemployment, low consumer confidence and top marginal tax rates on future stock returns.
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The return of fear has created an opportunity for the long-term equity investor to buy stocks at a major discount. This commentary by the OSAM Research Team may persuade clients to stay calm and, if possible, add to the equity market.
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Jim O’Shaughnessy studies how rare the current market downturn has been—and why it may present a once in a lifetime buying opportunity.
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Jim O’Shaughnessy comments on what we might expect to happen in the coming 11 years. His analysis suggests that it is during this timeframe that we may find the silver lining that should give investors hope and encouragement.
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Read how to avoid the most common roadblocks to successful investing. Jim O’Shaughnessy's commentary explores the importance of knowing the facts and understanding history in order to overcome the seduction of rhetoric and emotion—common pitfalls that trip up many investors.
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We are announcing a new initiative: the OSAM Research Partners Program. Through the program, we will begin building formal relationships with the brightest and most curious people we can find to produce new research for the benefit of our investors and the broader community.
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