Investment Education

Factor Investing

Factors are one of the building blocks of a systematic approach. They define the characteristics of attractive and unattractive stocks and provide a consistent, rules-based implementation of an investment philosophy. How does it work? In a long-only portfolio, a systematic factor strategy will overweight stocks that rank highly on a certain factor and underweight stocks that rank poorly on that factor. Using factors allows us to explain exactly why the portfolio is positioned the way it is and what the drivers of return are—every time.  


Value investing is one of the best-known and most-studied approaches to outperforming the broader market over the long term. Equity valuations can be quantified by the ratio of a fundamental anchor—like book value, earnings or cash flows—over price. There are many ways to measure the valuation of a stock—we find that using a combination of measures yields the most robust results. 


Simply put, momentum is the idea that assets that have recently outperformed will tend to do better than assets that have recently underperformed. This tendency  has been documented in at least as many asset classes as value and over even longer histories. A simple yet common measure of momentum is the last 12-months price return of an asset. Importantly, the returns of the momentum premium have tended to be negatively correlated to those of the value premium—which means they may offer investors great diversification benefits. 



Defensive stocks tend to be low-risk, stable or safe. As with most factors, there is more than one way to characterize a defensive company—from purely fundamental measures such as profitability and general quality to statistical measures such as low beta and low volatility. We find that both may help identify attractive stocks. For example, a defensive portfolio is likely to go long or overweight stocks that rank high on earnings quality and profitability and rank low on beta and volatility.