TARFA: A Novel Approach to Targeted Accounting Range Factor Analysis for Asset Allocation

Area of Science:

• Finance
• Investment Management
• Financial Accounting

Background:

• Company valuation is crucial for investment decisions and portfolio management.
• Existing valuation methods require integration of traditional and modern approaches for enhanced accuracy.
• Identifying key return-driving factors is essential for optimizing investment strategies.

Purpose of the Study:

• To introduce a novel valuation framework (TARFA) for comparable company analysis.
• To identify investor-preferred, return-driving accounting factors.
• To provide actionable insights for optimizing asset allocation and portfolio performance.

Main Methods:

• Integrated traditional and modern valuation approaches.
• Analyzed 68 accounting measures to identify key return drivers.
• Developed general and sector-specific TARFA models.
• Introduced the Relative Equity Score for identifying undervalued equities.

Main Results:

• The TARFA framework identified three key accounting factors driving superior returns.
• Both general and sector-specific TARFA models consistently outperformed population returns.
• The general TARFA model demonstrated superior performance in broader market contexts.
• Key financial ratios showed stability over time.

Conclusions:

• The TARFA framework offers a robust, integrated approach to company valuation.
• The identified accounting factors and Relative Equity Score enhance the ability to find undervalued equities.
• The framework provides valuable tools for investors and analysts to optimize portfolios.