Factor Investing

Factor Investing is an investment strategy that involves targeting specific drivers of return across Asset Classes. These factors are characteristics or attributes of Securities that are believed to influence their performance. Common factors include:

  • Value: Investing in undervalued Stocks, often identified by low price-to-earnings (P/E) ratios.
  • Size: Focusing on smaller companies, which historically tend to outperform larger ones.
  • Momentum: Buying Stocks that have shown strong recent performance, under the assumption that this trend will continue.
  • Quality: Selecting companies with high profitability, stable earnings, and low Financial Leverage.
  • Low Volatility: Investing in Stocks that exhibit lower price fluctuations than the broader market.

Examples of factor Investing strategies include:

  • A portfolio that includes small-cap Stocks combined with value Stocks to enhance potential Returns.
  • A momentum-based fund that only invests in Stocks that have outperformed their peers over the past year.

Cases where factor Investing has been applied effectively include:

  • The outperformance of small-cap Stocks during certain market cycles, leading investors to adopt size as a core factor in their portfolios.
  • During market downturns, low-volatility strategies have often provided better downside protection compared to higher volatility Stocks.