Factor-based investing

Factor-based indices represent an alternative method of constructing an index. As with any index, factor-based indices use a set of rules to identify a group of securities. However, rather than constructing the index purely based on the basis of a company’s market capitalisation, the rules aim to identify groups of companies with shared characteristics that align with a targeted factor such as low volatility or value.

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Factor-based investing video

Types of factors

Some of the factors, such as ‘value’ or ‘quality’, will probably be familiar to investors as popular investment styles in equity investing. The most common equity factors we find investors focusing on include:

Value: Stocks that are undervalued relative to market/peers based on company fundamentals

Value

Stocks that are undervalued relative to market/peers based on company fundamentals.

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Low volatility: Stocks with lower historic volatility relative to market/peers.

Low volatility

Stocks with lower historic volatility relative to market/peers.

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Stocks with higher profitability and/or less aggressive asset growth relative to market/peers.

Quality

Stocks with higher profitability and/or less aggressive asset growth relative to market/peers.

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Momentum: Stocks with positive share trend.

Momentum

Stocks with positive share trend.

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Sizae: Focusing investment in small or mid cap stocks and away from mega caps.

Size

Focusing investment in small or mid cap stocks and away from mega caps.

Thought leadership articles

Bringing our most compelling thoughts together on factor-based investing.

Overcrowding and capacity in factor-based investing: Should we be worried?

Many investors combine concerns over overcrowding in factors with capacity fears. We want to help separate these terms and provide some clarity over the current state of factors.

What the Stone Age can teach investors

Evolutionary psychology highlights a Stone Age-era mentality that is still hardwired into our brains, here we discuss  some of the behavioural biases that can explain factor premia.

Factor-based challenges

There are so many elements to consider when building factor-based solutions it can be overwhelming. We’ve highlighted two case studies of investors tackling these challenges.

Research papers

In this research paper we explore how much ‘juice’ is left in factors and how their performance profile may change in the future.

 

 

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In this research paper we discuss how an understanding of the design choices underlying multi-factor products is crucial if investors are to avoid outcomes that may ultimately disappoint them.

 

 

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