ANDREW'S ANGLE

Telling the factor story

Jun 5, 2018
By Andrew Ang, Phd

The capacity of factor strategies appears large 

Have you ever struggled to explain factor investing to clients or colleagues? Watch this video of how to tell the story.

April is National Poetry Month! To honor this art form, I’ll begin with a haiku:
Factor investing
Is not new, but best explained
By common sense tales

I am passionate about factor investing. Between teaching finance and leading a team of investment professionals, I have spoken the language of factors for decades.

But as I travel the world meeting with investors, I often come across people who are encountering factors for the first time. To help them understand this new way of investing, I often use metaphors.

Have you ever struggled to explain factor investing to clients or colleagues? I wanted to share two of my favorite story themes:

  • Innovation
  • Building blocks

Theme 1: innovation

When we wanted to drive somewhere 20 years ago, we pulled out a map in advance and looked up directions.

Now we have cell phones that can do the same thing on the fly. Plus, they warn us about traffic jams and suggest alternate routes. My old map didn’t do that! When I have access to GPS technology and crowd-sourced traffic data, it’s silly to go back to using maps that lack both the technology and the data.

Factors take familiar investment concepts — buying cheap (value investing), finding trends (momentum investing) or investing in high quality names. Just like our cell phones have transformed our lives.

Theme 2: building blocks

Our meals are made up of foods, such as meat, vegetables and dairy. Those foods are like the stocks and bonds used to build investment portfolios. Then we learned to dig deeper into each food to see its underlying nutrients — protein, carbohydrates and fat.

Today, we can see the nutrients of investments: factors! We can dig into each asset class or fund to see the underlying drivers of returns.

Just as nutrients keep us well fueled, factors are the building blocks that drive our portfolio returns.

Watch the story being told

We put together this short video to show how easy it can be to tell the story of factor investing.

Apr 25, 2018

I hope you find this helpful and can make the story your own. I will be telling a more detailed version of the story at our virtual conference on factor investing on May 1.

If you come up with new metaphors for factors, drop me a line. My clients will thank you for the new stories!

Andrew Ang, PhD
Head of Blackrock's Factor-Based Strategies Group
Andrew Ang, PhD, Managing Director, coordinates BlackRock's efforts in factor investing. He leads the BlackRock's Factor-Based Strategies Group.