The power of Lego

Which approach can make the most of factor investing?

Two basic methods exist to bring several factors into a single solution, called the Lego and soup approaches. We favor the Lego approach for a multi-factor solution. In Lego, a top-down allocation to individual factors allows for straightforward attribution of returns and risks, and for exposure to five or six different factors.

Lego is the approach of our preferred multi-factor solution based on the MSCI Select Factor Mix Index. It makes equal-weight allocations to six of the most established equity factors: Value, Size, Momentum, Quality, Yield, and Low Volatility. The index is rebalanced quarterly, which strikes a solid balance between turnover and maintaining the desired equal weighting for all six factors in the portfolio.

The alternative soup method aims to select stocks that qualify for several factor criteria at the same time, e.g. Value stocks that also exhibit good Momentum and Quality characteristics. We think this approach works well, but only when combining two or at most three factors. The Lego approach is more suitable for mixing together a higher number of factors.

A broad solution based on Lego can be suitable as a core equity investment, with the potential for outperformance in the broad market.

We invite you to download the most recent issue of our On Track Research for a closer look at factor investing.

Investors should be aware that past performance is not an indicator of future results.