The creation of this custom factor was driven by a specific request from a client, a long-only fund with almost $2bn in assets. The client sought to boost their performance by examining the impact of dividend yields on their portfolio. This factor would enable the investment team to assess exposure and examine return correlations, gaining insights into their portfolio that they did not have at that point. Our Quant team delivered a tailored solution, integrating it on the custom client portal and focusing on the ease of access to the requested infrastructure.
The Fama-French factor model initially included market risk, size, and value to explain stock returns, and has since been expanded to include profitability and investment patterns. These factors capture the nuanced behavior of different stocks, leading to more accurate predictions and better-informed investment decisions.
Dividend yield, the ratio of a company's annual dividend to its share price, is a crucial indicator of a stock's value. By developing a custom factor based on this ratio, we aimed to identify the client’s portfolio returns' connections, exposures, and correlations to dividend yield.
Data Collection and Preparation: Our already robust data infrastructure allowed us to efficiently handle and process extensive information, including high-level indices data and granular ticker-level data. As data quality was critical for the success and development of this feature, we employed rigorous cleaning and validation processes.
Factor Construction: We computed dividend yields for each company and standardized these values for comparability across sectors and market conditions. This involved normalizing the data and adjusting for outliers and anomalies.
Integration into the Model: Integrating the custom dividend yield factor into our existing multi-factor model was done after extensive testing and multiple iterations. We assessed the factor's predictive power and its correlation with other established factors.
Implementation and Monitoring: Once validated, the custom factor was integrated into our daily calculations and portfolio analytics, provided through direct email reports as well as live dashboards on our portal. Continuous monitoring and dynamic adjustments ensure that the factor remains relevant and effective and responsive to changing market dynamics.
Kiski Platform Solutions was envisioned with flexibility as a core feature – our customization capabilities allow our analysts and developers to deliver these tailored solutions quickly and efficiently. Clients receive precise, data-driven insights that align with their objectives and strategies, helping them achieve their goals without putting an additional burden on internal investment staff. By providing a swift response to client requirements, we make sure they maintain a competitive edge while staying focused on the markets.
