On the Persistence of Style Returns

Abstract

Most actively managed portfolios have either a transient or a permanent style bias. The question of whether style returns can be forecasted or timed is therefore intriguing. In this study, Beckers and Thomas focus on the persistence and predictability of the Barra style returns in the U.S., Europe, and Japan. Most of these style factors have, at times, been rewarded with significant risk premia. The authors show that actively betting on the persistence of historically significant style returns leads to noticeable outperformance as demonstrated by high information ratios. Exactly capturing the style returns is not straightforward, however. The authors thus analyze whether long-only and 130/30 style-tilted portfolios can approximate the desired style effects. Although these portfolios cannot fully replicate the pure style return, they are still extremely useful as part of a diversified style overlay strategy. The authors’ results indicate that style-tilted overlays can enhance the arsenal of active portfolio managers and that a judiciously diversified exposure to style-tilted overlays would have added significant value in the past.