Multi-Factor Models 101

Top-Down vs Bottom-Up

January 2018. Reading Time: 15 Minutes. Author: Nicolas Rabener.


  • Three common approaches for creating multi-factor portfolios are the Combination, the Intersectional and the Sequential models
  • The results from the Combination and Intersectional models are comparable in terms of trend
  • Each model has its own advantages and disadvantages, the selection will depend on investor preferences


One way to differentiate amongst investment managers is by examining whether they analyse stocks in a bottom-up or top-down approach. Whilst the former describes investors who specialise on individual securities, i.e. traditional stock pickers, the latter group prefers to analyse countries or sectors and therefore focus their efforts more on macro trends. There is no empirical evidence that one of these approaches is superior to the other; rather, the approach reflects the experience and philosophy of the fund manager and his firm. Factor investors can also be differentiated in a similar fashion as some build factor portfolios bottom-up while others create them top-down. In this white paper we provide an analysis of three common approaches for creating multi-factor portfolios, these being the Combination, the Intersectional and the Sequential models (read Intersectional Model: Sorting 7 Factors).


The analysis focuses on the following seven factors as components of the multi-factor portfolios: Value, Size, Momentum, Low Volatility, Quality, Growth and Dividend Yield across the following seven markets: US, Europe, UK, Japan, Australia, Hong Kong and Singapore. The factors are constructed as beta-neutral long-short portfolios by taking the top and bottom 10% of the stock universes in the US, Europe and Japan and 20% in other markets given smaller stock universes. Portfolios rebalance monthly, only contain stocks with market capitalisations larger than $1 billion and include 10 basis points of costs per transaction. The analysis covers the period from 2000 to 2017 (try Finominal’s Alpha Analyzer for a factor exposure analysis).


The three common approaches to creating multi-factor portfolios are the Combination, the Intersec