Everyone invests in Factors, although not all investors realize it. At its core, Factor-based investing really is about targeting the good, and avoiding the bad. Think of it like this, investors are faced with thousands of choices when it comes to selecting stocks for example. It is a daunting task, but it quickly becomes manageable when you group your choices based on common characteristics like quality, size, momentum, and value.
- Quality – The Quality Factor targets companies with efficient management, profitability, and strong cash flows. Quality strategies seek to provide excess returns by investing in companies that are better positioned for short and long term growth.
- Size – The Size Factor targets companies of smaller market capitalization. Size strategies seek to provide excess returns by investing in companies of smaller size that have more room to grow within their industries and geographies.
- Momentum – The Momentum Factor targets companies that have strong market sentiment and analyst sentiment. Momentum strategies seek to provide excess returns by investing in companies with strong tailwinds for higher growth than the benchmark.
- Value – The Value Factor targets companies that trade at low current valuations. Value strategies seek to provide excess returns as companies grow and their current valuations become more in line with normalized and prospective valuations.
Over the past 50 years, research shows that select groups perform better than others. Consider the S&P 500. A passive investment to the index can give you exposure to the large size factor. Yet over time, it may not be well compensated for the risk taken. However, if you precisely target the right groups within the index, the chance of reaching your investment objective increases considerably.
That’s why it’s important to target Factors intentionally. So yes, we’re all Factor investors and you can target the good and avoid the bad. When these groupings are created precisely and are actively managed, Factor investing becomes a powerful way to efficiently target your desired outcomes.