Value Factor – Intra vs Cross-Sector

How Effective is Sector-Neutrality?

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


  • Intra versus cross-sector Value portfolios share the major trends
  • Neutralising the sector exposure increases the risk-return ratio of the Value factor
  • However, the benefits are marginal and come with higher operational complexity


2018 started almost identical to 2017 in terms of factor performance in the US – Momentum, Growth and Quality gained while Value lost. Investors with a Value focus naturally hope for a better performance this year as they have effectively experienced a lost decade given a flat factor performance since 2008. Aside from waiting for a more favourable environment for Value stocks, which in itself is challenging to identify, investors aim to improve how they define Value stocks and construct portfolios. One common research question is if there is a difference between sector-neutral and cross-sector portfolios. Investors might assume that the factor performance is more attractive if any unwanted risks such as sector exposure are neutralised. In this short research note we will analyse the Value factor in the US intra versus cross-sector and evaluate eliminating any sector-risks (read There is Value in the Value Factor).


We focus on the Value factor in the US, which is defined as a combination of book-value and price-earnings multiples. The factor is created by constructing long-short beta-neutral portfolios of the top and bottom 30% stocks. Portfolios rebalance monthly and include 10bps of transaction costs. Only companies with a market capitalisation of larger than $1 billion are included.


A Value factor portfolio simply represents a portfolio of cheap stocks on the long side and expensive stocks on the short side. The chart below shows the breakdown by sectors for the long portfolio of the cross-sector Value factor in the US from 2000 to 2018. We can observe that Financial stocks dominate the long portfolio currently and historically, i.e. seem perpetually cheap. The analysis highlights the significant sector exposure of the cross-sector portfolio over time, which may be undesirable for investors aim