Whenever there are opportunities to generate enhanced returns, the global asset management industry will seek to exploit these opportunities. This is especially true when there are market anomalies which have a well-researched potential to generate additional returns, the so-called alpha, over the long run in the portfolios of investors. Some of these well-researched sources of alpha are the so-called factors. Factor investing is an investment approach that targets specific quantifiable characteristics of a security, which can explain differences in the returns of securities. There are three kind of factors which can be seen as drivers for the returns of all

Factor investing ETFs are ETFs which are replicating an index that is using one of the scientifically proven factors (dividends, growth, liquidity, momentum, quality/credit quality, size, value, volatility, and yield) to determine its constituents. As a result, from this process the portfolio of the factor investing index may vary significantly from the portfolio of the parent index, even while investing in the same market(s). Since there is scientific proof that the factors mentioned above are able to generate alpha compared to their parent index over a full investment cycle, some investors and market observers used the term smart beta for

Exchange-traded funds (ETFs) that invest based on factor strategies have become very popular in Europe over the last three years. Investing with a factor strategy means these funds do not follow a market capitalization-weighted index. Since “factor-based strategy” is a technical term that sounds rather complex, marketing departments and media companies have named these products “smart beta ETFs,” since the factors and strategies used generate better risk-adjusted returns over time than do market capitalization-weighted indices. The main factors used in these strategies are: Low volatility/minimum variance Momentum Size Quality Value These factors have either a regional or global investment focus.

StarMine models help choose companies with poor earnings quality.

StarMine picks three North American companies with good earnings quality.

Arcelik performs strongly on most StarMine models and looks to have stable earnings.

There seems to be a shift to value and quality in Asia, and Belle may be one of the beneficiaries.

In the low interest rate environment in Taiwan, Lite-On Technology dividends look sustainable and attractive.

Nine Dragons performs strongly across StarMine models, with strong analyst revisions momentum, good earnings quality.

Mondi appears to be a hidden gem in South Africa with strong earnings quality and valuation.

At the end of each earnings season, the StarMine team at Thomson Reuters uses the StarMine Earnings Quality model to identify companies with strong or poor earnings quality – two in each category. The Earnings Quality model employs a quantitative multi-factor approach to predict the persistence of earnings. It differentially weights the sources of earnings based on analysis of their relative sustainability. Our picks for companies in North America for this quarter that display good earnings quality are — O’Reilly Automotive Inc. (ORLY.O) and Ciena Corp. (CIEN.N). We’ll publish the other two with poor earnings quality in a subsequent post.