1.6.18 Factor returns
In Scientific Infra and Private Assets' pricing methodology, we decompose the excess expected return of an asset into multiple factors: size, leverage, profit, and investment. The exposures to each of those factors determine the returns that an asset can generate. By using long-short factor mimicking portfolios, we attribute the returns of infrastructure assets due to each of these factors.
Investors can use these factors for return attribution of their infrastructure portfolio, or in factor investing by selecting assets that have high/low exposures to each of these factors. The calculations of the individual factor returns are described below.
Size Factor Return (small minus big - SMB)
where:
Assets:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Leverage:
Low: Leverage ≤ Median Leverage
Medium: Median Leverage > Leverage ≤ 80th Percentile Leverage
High: Leverage > 80th Percentile Leverage
Profit:
Low: Profit ≤ 20th Percentile Profit
Medium: 20th Percentile Profit > Profit ≤ 80th Percentile Profit
High: Profit > 20th Percentile Profit
Investment:
Low: Investment ≤ Median Investment
Medium: Median Investment > Investment ≤ 20th Percentile Investment
High: Investment > 80th Percentile Profit
Leverage Factor Return (high minus low - HMLLeverage)
where:
Assets:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Leverage:
Low: Leverage ≤ Median Leverage
High: Leverage > Median Leverage
Investment Factor Return (high minus low - HMLInvestment)
where:
Assets:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Investment:
Low: Investment ≤ Median Investment
High: Investment > Median Investment
Profit Factor Return (high minus low - HMLProfit)
where:
Assets:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Profit:
Low: Profit ≤ Median Profit
High: Profit > Median Profit
Market Factor Return
Market Factor Return = average return across all companies