Profitable, growing, safe, well-managed firms beat 'junk' — and the market underpays for quality.
Asness, Frazzini & Pedersen · Review of Accounting Studies · published 2013 · original sample 1957–2016 (reported ≈ +5.0%/yr, t ≈ 5.9)
Growth of $1 in the long-short strategy, gross of trading and shorting costs. The dashed line marks the year the paper was published — everything to its right is out-of-sample.
$1 in the long-short strategy, gross of costs. Grey = the sample the paper had; blue = everything since.
The comparison the site is built around.
| Window | Return/yr | Vol | Sharpe | t-stat | Max DD |
|---|---|---|---|---|---|
| Paper's sample (1957–2016) | +4.1% | 7.4% | 0.58 | 3.8 | -28% |
| After publication (2014–2026) | +2.8% | 10.7% | 0.31 | 1.1 | -36% |
| Full sample (1957–2026) | +3.7% | 8.1% | 0.49 | 3.6 | -36% |
Is there a risk-adjusted alpha left once you control for the standard factors? Alpha is annualized; t-stats use Newey–West standard errors.
| Model | Alpha/yr | Alpha t | R² | Biggest loadings |
|---|---|---|---|---|
| CAPM (market only) | +6.1% | 6.1 | 0.26 | Mkt-RF -0.28 |
| Fama–French 3-factor | +6.7% | 7.0 | 0.37 | SMB -0.26, Mkt-RF -0.24, HML -0.08 |
| Fama–French 5-factor | +4.0% | 5.6 | 0.68 | RMW +0.64, Mkt-RF -0.20, HML -0.17 |
| FF5 + momentum | +3.5% | 5.3 | 0.69 | RMW +0.63, Mkt-RF -0.19, HML -0.14 |
Trailing 3-year Sharpe ratio. Long stretches below zero are common.
| 1950s | +3.2%/yr | Sharpe 0.76 |
| 1960s | +2.1%/yr | Sharpe 0.42 |
| 1970s | +1.4%/yr | Sharpe 0.19 |
| 1980s | +6.7%/yr | Sharpe 1.31 |
| 1990s | +5.2%/yr | Sharpe 0.82 |
| 2000s | +6.5%/yr | Sharpe 0.56 |
| 2010s | +4.3%/yr | Sharpe 0.58 |
| 2020s | +0.4%/yr | Sharpe 0.03 |
Hard to argue quality firms are riskier — that is the point. AFP frame the small premium as evidence the market only partially prices quality.
Investors chase glamour and story stocks; safe compounders are 'boring' and left slightly cheap.
Broad, low-turnover, and a clean hedge to value — it tends to do well exactly when value does badly. Out-of-sample it has held, though the premium is modest.
Long-short = AQR's published factor series. Value-weighted, US equities, monthly, gross of transaction and shorting costs. The original-paper figures are approximate and annualized for comparison.