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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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.

 

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.

 

Size

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

Forward-looking estimates of factor risk and return

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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