Investor Corner/The asset classes/Factor Investing and ESG
2.6.1 Factor Investing
Factor investing builds portfolios around specific characteristics, such as Value, Momentum, Quality, Low Volatility and Size, that have historically delivered higher returns over long periods than the broad market alone.
What a factor actually is
A factor is a measurable, persistent characteristic of a stock, such as trading cheaply relative to fundamentals, or having shown strong recent price momentum, that has historically been associated with different average returns compared to stocks lacking that characteristic. Factor investing deliberately tilts a portfolio toward stocks exhibiting one or more of these characteristics, rather than simply holding the market as a whole.
How factor funds are typically built
Many factor funds and smart beta indices use rules-based, systematic methods to select and weight stocks according to one or more chosen factors, aiming to capture the historical factor premium at a lower cost than a fully discretionary, actively managed fund attempting the same goal.
Why factors are not a guaranteed edge
Individual factors can, and regularly do, underperform the broader market for extended stretches, sometimes lasting several years, before eventually reasserting their long-run historical advantage. Factor investing requires the same kind of patience through difficult periods that any long-term strategy demands, and it is not a way to reliably avoid volatility or underperformance in any given short period.
How PriLytics helps. PriLytics shows the true style and sector exposure hidden inside every fund you hold, helping you understand any factor tilts already present in your portfolio. See true asset allocation.