Key Points

  • 2024 to be inflection point for interest rates, but outcome unclear.
  • Identifying the right Value measure critical to better performance.
  • Quality factor has shown resilience during economic slowdowns.
  • Momentum helps to capture emerging trends.

  • Deploy multiple factors to mitigate risks from different scenarios.

Looking ahead, we believe that the US is likely to enter a shallow recession from mid-2024 onwards. Across the Atlantic, Europe and the UK are quite possibly in recession already. That said, there’s also a growing possibility that the US will successfully bring inflation under control without dragging its economy into recession – the so-called ‘soft landing’. 

How should investors position themselves to take advantage of outcomes which are very different but seem, at least for now, to be almost equally likely?

Rather than pick individual stocks, quantitative equity investors build highly-diversified portfolios, often constructing baskets of stocks that are designed to have exposure to specific ‘factors’ that may include:

  • Value
  • Quality
  • Momentum

These factors typically perform quite differently from each other.

Why Value?

There is a wealth of empirical and academic evidence showing how Value factors outperforms over the longer term –especially if investors are chasing the latest ‘hot’ trend.

But how do you measure Value? In fact, there are many different Value measures, each with its own risk and return profile (see Chart 1).

Chart 1: 5 Value measures in Multi-Factor investing

Source: abrdn, (Jan 2000-Nov 2023)

Book yield, free cash flow yield

It is worth examining two of these in more detail:

  • Book yield (the reciprocal of price-to-book) – a measure of deep, cyclical Value.
  • Free cash flow (FCF) yield – a Value factor that also has Quality characteristics.

It’s the relationship between these two that is a key reason why a Multi-Factor investing approach can be so attractive.

What back testing tells us

We tested book yield and FCF yield on a global equity investment universe going back to 1990, to see how these Value measures perform in a variety of market conditions (see Chart 2) .

For each month, we ranked every stock by the chosen factor and went long (we bought) the 20% of stocks which had the highest book yield or FCF yield, and we went short (we sold) the most expensive 20% of stocks according to the same Value measures.

We then calculated the performance for the subsequent month and repeated this process for every month over the back-test period.

Chart 2: Performance of FCF yield & book yield for global equities

Source: abrdn, November 2023
Note: IR (Information Ratio) is a measure of risk-adjusted return relative to the benchmark (the higher the better). 

We found that:

While book yield does well over the long term, this Value measure has failed to shine during periods of low interest rates, such as the one since the 2007/2008 global financial crisis until the beginning of last year.

Meanwhile, FCF yield stocks – which often have stable revenues, earnings and dividends – are able to do better in a variety of market environments.

While FCF is considered a Value factor, which is biased towards cheaper stocks which tend to perform well when the economy is improving, it also has Quality attributes that can deliver diversification benefits.

What does this all mean?

As we approach a potential inflection point for inflation and global interest rates – which may or may not lead to a US recession – it is worth considering what this means for a Multi-Factor approach.

We think investors should consider investing in multiple types of Value to gain ‘Deep Value’ exposure that will likely do well in a ‘soft landing’ scenario, as well as ‘Defensive Value’ that should perform relatively better in a recession.

There’s more…


We can further boost expected risk-adjusted returns by exploiting attractive correlation properties available across measures of capital structure and profitability.

While interest rates are expected to decline next year, they are likely to remain higher than investors have become accustomed to.

This will be challenging for companies as consumer spending slows due to high prices and pandemic-era savings run out. Meanwhile, labour costs are likely to remain elevated, while corporate debt is refinanced at higher rates.

This suggests companies with good profitability and disciplined capital allocation are better positioned to do well. In other words, Quality companies.

We define Quality as a composite of profitability, low accruals and low investment (firms with aggressive capital expenditure plans, on the other hand, often invest in projects that earn less than their cost of capital).


This is the glue that helps hold a Multi-Factor portfolio together. The dynamic nature of Momentum helps us capture trends over time as investors change their views and preferences.

During a time of great uncertainty, an exposure to Momentum can help to remain invested in the stocks that will emerge as winners.

In the Multi-Factor back-test, we analysed how Value, Quality and Momentum perform separately and in aggregate (see Chart 3).

Chart 3: Performance of Value, Quality, Momentum and Multi-Factor global equities

Source: abrdn, November 2023
Note: IR (Information Ratio) is a measure of risk-adjusted return relative to the benchmark (the higher the better).

Although all three individual factors have generated positive returns over the review period since 1999, each can suffer from prolonged periods of mediocre performance.

That said, and crucially, the individual factors have fairly low, zero, or even negative correlations with one another (see Chart 4).

Combining them, therefore, in a Multi-Factor approach can help investors mitigate the risks that may arise in different economic scenarios.

Chart 4: Value, Quality, Momentum factors correlations
  Value Quality Momentum
Value 1.00    
Quality -0.05 1.00  
Momentum -0.48 0.36 1.00

Source: abrdn, FactSet, Jan 2000- November 2023.
Note: A positive correlation shows that factors move in the same direction and a negative correlation shows that factors move in different directions.  

Final thoughts

The need for real diversification has become painfully necessary over the past two years. This has been especially true for factor investing in 2023.

Although one factor – Cyclical Value – was challenged in the US market, FCF yield has compensated for this. Whereas balance sheet quality has underwhelmed, Value and Size (smaller capitalisation stocks) stepped up. Everywhere, Momentum has been supportive of a Multi-Factor approach.

In 2024, we see a continuation of the tailwinds benefiting a systematic approach that diversifies both across and within factors by identifying, and investing in, different types of Value and Quality.

We believe, therefore, that a pragmatic and judicious mix of measures across the factor spectrum is a good approach for next year and beyond.