Long-Only Factor Portfolios: Beyond Fama-French
Backtesting 13 non-traditional return drivers as long-only top-10 portfolios in the S&P 500. Low Vol and Asset Turnover stand out on a risk-adjusted basis.
As a follow-up to the factors we explored previously, this post reviews 13 non-traditional return drivers as simple long-only, top-10, monthly-rebalanced portfolios in the S&P 500 — a back-of-envelope exercise to see how different fundamental and technical signals map to return patterns. These are illustrative, not backtests of implementable strategies: no transaction costs, no survivorship correction, no multiple-testing adjustment. Treat the numbers as directional.
The Return Drivers
| Return Driver | Category | Core Idea | Measurement | Ideal Values |
|---|---|---|---|---|
| High EBIT/EV | Growth | Earnings before interest and taxes relative to enterprise value | EBIT / enterprise value | High |
| FCF/Price | Value | Free cash flow relative to stock price | FCF / stock price | High |
| Cash/Assets | Value | Proportion of assets held in cash | Cash / total assets | High |
| Inventory Change | Fundamentals | Efficiency of inventory management | Change in inventory over period | High |
| Asset Turnover | Fundamentals | Efficiency of asset utilisation | Revenue / average assets | High |
| ROE | Fundamentals | Profitability relative to shareholder equity | Net income / shareholder equity | High |
| ROA | Fundamentals | Profitability relative to total assets | Net income / total assets | High |
| EBITDA Margin | Fundamentals | Operating profitability excluding certain expenses | EBITDA / revenue | High |
| ROCE | Fundamentals | Efficiency of capital employed | EBIT / capital employed | High |
| Momentum | Technical/Price | Price trend continuation | Rate of change in price over time | High |
| Low Beta | Technical/Price | Lower systematic risk relative to market | Beta estimate | Low |
| Low Vol | Technical/Price | Lower return volatility | Standard deviation of returns | Low |
| Price/Sales | Technical/Price | Market capitalisation to total sales | Market cap / total sales | High |
Methodology
For each return driver, I rank all companies in the S&P 500 from best to worst and go long the top 10, rebalancing monthly. The investment universe is S&P 500 constituents at each point in time who have at least 1 year of price data and who are not in the top 10% of firms ranked by beta — there’s evidence that extremely high-beta firms generally don’t do well in the long run, so I filter those out across all tests. The backtest period is January 2000 to July 2023.
Results
| Avg. Ann. Return | Avg. Ann. Std | Annual Sharpe | Worst Loss 1Y | Winning Years | |
|---|---|---|---|---|---|
| Inventory Change | 10.30% | 20.50% | 0.50 | -52.11% | 79.17% |
| Asset Turnover | 11.52% | 14.74% | 0.78 | -29.84% | 87.50% |
| ROE | 11.42% | 17.08% | 0.67 | -25.21% | 79.17% |
| ROA | 9.90% | 19.56% | 0.51 | -49.22% | 83.33% |
| EBIT/EV | 9.32% | 25.21% | 0.37 | -52.24% | 75.00% |
| EBITDA Margin | 8.76% | 23.35% | 0.38 | -62.64% | 70.83% |
| FCF/Price | 10.34% | 29.09% | 0.36 | -70.58% | 62.50% |
| Low Beta | 8.87% | 11.03% | 0.80 | -23.18% | 83.33% |
| ROCE | 7.36% | 17.63% | 0.42 | -54.32% | 83.33% |
| Momentum | 7.37% | 24.29% | 0.30 | -77.60% | 75.00% |
| Low Vol | 10.17% | 11.43% | 0.89 | -13.87% | 75.00% |
| Cash/Assets | 8.95% | 24.97% | 0.36 | -73.99% | 70.83% |
| Price/Sales | 10.35% | 28.25% | 0.37 | -71.79% | 75.00% |
What Stands Out
A few observations from the results:
Low Vol dominates on a risk-adjusted basis. A 0.89 Sharpe with a worst 1-year loss of only -13.87% is remarkable for a 10-stock portfolio. Low Beta tells a similar story (0.80 Sharpe, -23.18% worst loss). These two factors deliver their returns through volatility compression rather than raw alpha — useful if your binding constraint is drawdown tolerance.
Asset Turnover is the quiet winner among fundamentals. An 11.52% annualised return with 14.74% volatility and 87.5% winning years is an attractive profile. The -29.84% worst year is manageable. Efficiency of asset utilisation appears to be a meaningful and persistent signal.
Momentum is poor in long-only form — a 0.30 Sharpe and -77.60% worst year. Momentum tends to work better as a long-short factor where the short leg captures the reversal in losers. In long-only form, you’re only getting half the story.
These are 10-position concentrated portfolios, so the results are inherently noisy. Adding more positions would smooth returns but dilute the factor signal. The right portfolio size is a function of your conviction in the signal and your tolerance for tracking error — a tradeoff worth thinking about carefully before implementation.