Investment Approach

Multi-Factor
Investment Approach

No Black Boxes Here

Gerstein Fisher takes a quantitative, Multi-Factor® approach to equity investing that provides clarity of objective and complete transparency of process. There’s no mystery here; no “just trust us”—we want our clients to understand exactly how we are investing on their behalf—and why.

Gerstein Fisher uses a model-based, Multi-Factor® investment approach to building client portfolios. This approach has its roots in the Arbitrage Pricing Theory (APT) pioneered by MIT finance professor Steven Ross in 1976. The main argument of APT is that excess returns over the market can only be achieved by taking on extra risk. A portfolio’s expected return, APT goes on to explain, can be determined by its exposure to various risk factors. It is this rationale that drives the construction of modern-day multi-factor models like Gerstein Fisher’s.

 

Taking risk—where we expect to be compensated for it

Using our proprietary multi-factor models, Gerstein Fisher constructs globally diversified portfolios with strategic “tilts”, or overweights, relative to the index to risk factors including (but not limited to):

  • Size (Premium for being in smaller vs. larger company stocks)
  • Price (Premium for being in value vs. growth stocks)
  • Momentum (Premium for being in stocks with positive recent price momentum)

This investment approach allows us to focus on risk and behavioral factors that historically have rewarded investors in the form of enhanced return over a market index while still maintaining broad market exposure for our clients. Over the long term, we believe this is the only systematic way to out-earn the equity market as a whole. And by not taking outsized “bets” on individual securities, sectors or countries as is common with many traditional equity management strategies, our objective is to reduce the risk of significant underperformance relative to traditional benchmarks.

The benefits of an objective, structured investment approach

Gerstein Fisher’s multi-factor investment approach enables us to make investment decisions based on relationships that are borne out by research and data, not emotion or “gut feelings”. By filtering information mathematically instead of qualitatively, we know exactly why we own what we own, and can articulate this rationale to our clients. When looking at performance on an ex-post basis, we can isolate and explain what drove returns. A multi-factor framework provides reason, clarity and discipline to our process, and ultimately we believe it’s the most compelling way to invest on our clients’ behalf.

Research that never stops

While disciplined and structured, our process also accounts for the fact that markets are dynamic. On an ongoing basis, research professionals in our Investment Strategy Group often in conjunction with academic leaders in the field of asset pricing – are investigating new factors and relationships among factors, and testing the efficacy of the factors and themes we use in our models.

What is a multi-factor model?

Multi-factor models are designed to describe and quantify the relationship among security returns in a portfolio. The basic premise of factor-based analysis is that similar stocks should have similar risk/return profiles. This similarity is measured in terms of attributes, or “risk factors”. Mathematical in nature, multi-factor-based portfolio construction eliminates the possibility that security selection decisions are influenced by subjective or behavioral biases that might compromise the portfolio’s long-term return potential.

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