Measuring Factor Crowding via Valuations

Investigating Crowd Control Measures for Factor Investing

June 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Fundamental factor valuations can be used to identify factor crowding
  • However, the approach does not improve risk metrics
  • A multi-metric approach for identifying factor crowding is likely more successful


The Value factor has generated flat returns over the last decade, which has been challenging for the most dedicated Value investors. Given that the average mutual fund holding period is three years, investors might question if the Value factor has become a contrarian call, which arguably makes it less risky compared to investing in the growth-oriented FAANG stocks. Factors, from a Value perspective, should be more attractive if they are cheaper and uncrowded and more risky if they are expensive and crowded. In this short research note we will analyse factor crowding from a fundamental valuation perspective using price-to-book multiples, starting with the Value factor as a case study and then expanding the analysis to other common equity factors.


We focus on seven factors namely Value, Size, Momentum, Low Volatility, Quality, Growth and Dividend Yield in the US. The factor definitions are in line with industry standards and the factors are created via long-short beta-neutral portfolios based on the top and bottom 10% of the US stock market. Only stocks with a minimum market capitalisation of $1 billion are included. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.


The concept of valuing a security with fundamental multiples can be applied to single stocks as well as to factors. In the case of factors, the valuation can be determined by measuring the price-to-book multiple spread, which is derived by subtracting the multiple of the short portfolio from the multiple of the long portfolio. For example, if the long portfolio has a price-to-book multiple of 1.0x and the short portfolio of 5.0x, then the spread is -4.0x. If assets are flowing into the factor, then the long portfolio will become more expensive as investors are buying the cheap stocks and the short portfolio will become cheaper as investors are selling the expensive stocks, which will result in a more positive spread. Stated from a Value perspective, the higher the price-to