Flexibility is one of the key benefits of our expected return factor model. It can:
- be used to improve portfolio performance by accurately predicting
winners and losers within a group of value or growth stocks
- enhance the payoffs to long, short and market neutral strategies,
- respond effectively to changing market conditions
Unlike statistical models with a fixed set of rules for picking stocks, the Haugen model with its huge
array of more than 70 factors is able to replicate the kind of “feel for the markets” that experienced
money managers demonstrate.
The model accurately projects not only size changes in the payoff to a given factor, but also sign
changes. For example, payoffs to stocks paying relatively high dividends might be positive one month,
but negative the next. As a result, you can predict with a high degree of accuracy, a forthcoming
change in the payoff to a given stock.
This enables money managers to more accurately time portfolio adjustments, i.e., to buy at bargain
prices and sell at the top of a slide.
Our model has also been shown repeatedly to respond to current market conditions. In the long run,
the model favors portfolios of stocks that are in the aggregate relatively cheap, profitable, liquid,
and minimally volatile. However, the Haugen model will, over shorter periods, shift from favoring
value, to growth, to growth at a reasonable price.
What makes it so powerful? It does what no human can – it analyzes the impact of 70+ factors on the
expected returns of more than 3,000 stocks simultaneously. This enables it to forecast future
performance on the basis of constantly changing conditions.
This model is even flexible enough to predict a rise in the price of a particular energy stock,
while “judging” that the sector as a whole will go down. In the hands of a savvy investment
professional, the Haugen model is clearly a winning tool.