A matter of factor

Why is factor-based investing becoming increasingly popular among investors?

05 Apr 2018

Factor-based investing is becoming increasingly popular among investors. For the most part, however, it has been the domain of individual stock pickers. This is progressively changing as more and more investors finely tune their portfolio, reducing unintended and/or unrewarded risk.

Aim of the report:

Construct 5 global factor portfolios using data across 37 countries
 

Analyse the performance of these single factor portfolios through time to access factor behaviour
 

Test four of the most common factor-based anomalies

Assess the diversification benefits of multi-factor portfolio compared to the MSCI World Index
 

Investigate the value the market puts on factor investing through time
 

Key research takeaways:

Factor investing generates a positive return over the broad world market index. This is true in an absolute and risk-adjusted sense

Factors are influenced by the economic cycle, so timing entry into and out of factors is important
 

Investors should consider the frequency of rebalancing a factor portfolio – approach will depend on the factor

Correlation between factors is unstable and highly dependent on the time frame considered, namely due to the changing membership of the factor profiles
 


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