Factor Investing
AdvancedFactor investing is an investment approach that targets specific characteristics, called factors, which research has linked to differences in returns, such as value, size, momentum, quality and low volatility.
Research has found that certain characteristics of securities have been associated with higher returns, or different risk, over long periods. Factor investing builds portfolios that deliberately tilt towards these characteristics.
Common equity factors include value, favouring shares that are cheap relative to fundamentals; size, favouring smaller companies; momentum, favouring recent winners; quality, favouring profitable companies with strong balance sheets; and low volatility, favouring shares with steadier prices.
For example, an investor might hold a broad market index fund alongside a fund tilted towards smaller, cheaper companies, aiming to capture value and size premiums over time.
Factors can underperform the overall market for long periods. Value shares, for instance, lagged growth shares for much of the 2010s. Debate continues about whether factor premiums reflect compensation for risk, investor behaviour or patterns found in past data that may not persist. Factor investing is often implemented through smart beta funds.
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