Pursue investment outcomes with factors

The ideas behind factors aren’t new. But their use is being enhanced by data and technology.

What are factors?

Factors are the foundation of portfolios—the broad, persistent forces that have historically been seen to drive returns of stocks, bonds and other assets.


Factor investing leverages advancements in today’s data and technology to deliberately seek these historical return drivers in portfolios. Understanding how factors work could potentially help you capture investment returns and reduce risk, just as leading institutional investors and active fund managers have done for decades.

Types of factors

There are two main types of factors that have driven historical returns: macroeconomic factors, which capture broad risks across asset classes; and style factors, which help to explain returns and risk within asset classes.

MACROECONOMIC FACTORS

Macroeconomic factors capture broad risks that exist across asset classes. Our research suggests that risks associated with economic growth, real rates, inflation, credit, liquidity, and emerging market factors explain over 90% of asset class variation.

ECONOMIC GROWTH
exposure to the
business cycles

  

CREDIT
Lending to companies,
as opposed to governments

REAL RATES
Bearing risk of rising rates

  

EMERGING MARKETS
Absorbing the additional
political and economic risk
from investing in emerging markets

INFLATION
Assuming exposure to changes in prices

  

LIQUIDITY
Holding illiquid assets

STYLE FACTORS

Style factors explain risks and returns within asset classes, including not just equities but also fixed income, commodities, currencies, and even private markets like private equity and real estate.

MINIMUM VOLATILITY
Stable stocks can potentially outperform
more volatile stocks on a 
risk-adjusted basis

  

QUALITY
Financially healthy firms
have typically performed
better over time

MOMENTUM
Stocks with strong
recent performance have tended
to maintain higher returns

  

SIZE
Small, high-growth companies
have tended to outperform
their larger counterparts

VALUE
Inexpensive stocks relative
to fundamentals such as
price-toearnings have
tended to outperform

Why invest in factors

Institutional investors and active managers have been using factors to manage portfolios for decades. Today, data and technology have democratized factor investing to give all investors access to these historically persistent drivers of return.

Andrew Ang, Ph.D.
Head of Factor-Based Strategies
Factor investing is the way of the future. It’s about empowering investors to deliberately and directly access ideas to help achieve their financial goals.
Andrew Ang

More about factor investing

  • Smart Beta is one subset of factor investing. Factor investing harnesses the power of broad and persistent historical drivers of return. Factor investing can refer to macroeconomic factors (which affect returns across asset classes) as well as style factors (which affect returns within asset classes) and can be implemented with or without leverage. Smart Beta strategies generally refer to style factors within a single asset class, implemented without leverage.

  • When it comes to factor-based strategies, investors have a lot of options. Each strategy is constructed in a unique way and may have different risks. It’s important that investors understand what risks are applicable to each strategy and how those may fit within their overall portfolio. Investors who choose long-short factor strategies will add risks associated with leverage.

  • One of the most pervasive myths around factor investing is that it must be used instead of indexed or active investments. Factor-based strategies can be used both to replace and to complement traditional index or active investments in the portfolio.

  • As with any investment, there's no guarantee of performance. Individual factors have tended to perform well at different parts of the economic cycle, and may be less correlated with equity market moves. Be aware of this aspect of factor investing as you investigate whether any particular strategy makes sense with your investment goals. A multi-factor investment is diversified across factors and may help to reduce the effect of this cyclicality.

Want to learn more?

To learn more about how individual factors are at the heart of Smart Beta strategies, visit our Smart Beta website.