In this article we explain how ideas with roots in the 1970s – from factor investing to the foundations of UBS HOLT – are being applied to modern index and rules-based strategies through new data, research and portfolio construction techniques.
The 1970s are commonly associated with: Star Wars and The Godfather, punk rock and disco music, bell-bottom trousers and platform shoes, the foundation of Microsoft and Intel’s first general microprocessor.
But that decade also marked several important developments in the investment world:
- In 1971, the first index portfolio was constructed.
- In 1976, Stephen Ross introduced the Arbitrage Pricing Theory (APT), showing that multiple risk factors drive asset returns rather than just market beta. The APT helped provide the intellectual foundations for modern multifactor investing.
- Throughout the 1970s, Bart Madden and Bob Hendricks developed a unique framework of analysing companies focusing on their cash generating abilities, the precursor to UBS HOLT (HOLT is an acronym from the first letters of the founders’ last names: Bob Hendricks, Eric Olsen, Marvin Lipson, Rawley Thomas).
Half a century later and, although the tools have changed dramatically, the underlying questions haven’t. Investors still ask: what drives returns, how can companies be compared on a consistent basis, and how can those insights be translated into portfolios without surrendering transparency or discipline?
Indexing and factor investing are well established, but UBS HOLT may be less familiar. It is an objective equity valuation framework used for comparing and valuing companies. At the framework’s core is CFROI® (Cash Flow Return on Investment), which is a core proprietary measure of corporate profitability, adjusted to eliminate accounting distortions. CFROI® is a proxy for a company economic return, akin to internal rate of return on a project, but it applies to companies covering their entire capital structure.
Read the full ‘Thought Leadership’ article at the link below
