Universal return and factor timing

• Main Authors: NEO, Poh Ling, TEE, Chyng Wen, KERKHOF, Jeroen
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7648; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8647/viewcontent/ssrn_4975565.pdf
• Institution: Singapore Management University

The authors highlight the shortcomings of commonly used performance graphs in assessing and comparing investment returns. This paper's main conceptual contribution is the introduction of Universal Return (UR) - a visual method to evaluate and rank investment strategies that challenges the traditional focus on raw performance statistics. The authors argue that the ranking of investment performance when viewed from a pool of investors over different entry time is more important than its overall absolute returns, as it better aligns investment analysis with the needs of investors, who are primarily concerned with identifying currently successful strategies or managers rather than dwelling on past performance. UR is applied to the problem of factor timing and selection, and it is shown to outperform other timing strategies. The UR-based approach also exhibits robustness to transaction costs, suggesting its effectiveness in capturing genuine shifts in factor performance dynamics.