In a previous post I undertook a very simple analysis to show that factor investing during inflation helps investors to stop from simply treading water – at least, if history is any guide. An interlocutor asked if I’d looked into quality factors and I said that I would get around to it.
In fact, there is something very interesting in the quality factor analysis – something that highlights an aspect of inflation that is not properly appreciated by most economists and investors.
First, let us take a look at how returns stack up during inflations for the standard Fama-French quality factors. Once again, I will be using my ‘factor enhancement’ ratio – that is, the ratio of average returns during various levels of inflation relative to the total average return for that factor.Read More »