Speaker: Derek Bergen, CFA, portfolio manager, and quantitative research analyst
- The evolution of quantitative finance presumes that the identification of undervalued securities is no longer a necessary consideration in portfolio construction, which has materially shifted equity allocation towards passive and factor-based strategies over the last decade.
- Out-of-sample study of a comprehensive intrinsic value framework within asset pricing studies popularized by Fama French indicate that an intrinsic value factor provides significant alpha in asset pricing.
- Development of an asset pricing model based on valuation principles explains cross-sectional returns better than other commonly cited models, indicating that the abandonment of net present value techniques and the best practice in security analysis is a shortcoming in current factor literature.
We will discuss practical implications for investors:
- Price multiples are not a reliable proxy for intrinsic value.
- The investment rate factor’s preference towards low/negative growth is not consistent with the role of growth in creating shareholder value.
- Passive strategies deliver significant negative alpha against asset pricing models that incorporate an intrinsic value framework.
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