Did you know you’re already a factor investor?

factor investing

You have looked at the performance history of your investments before making your choices. And you’ve taken into account their risks. You have done the research. But have you factored in everything?

Whether you are aware of them or not, factors are a part of your investments. Factors are important indicators of risk and return, and they tell investors a lot about their portfolios.

So what is a factor?

A factor can be thought of as a quantifiable characteristic of a financial asset which to a large part explains the return and risk characteristics of a portfolio. The most useful factors are those that consistently explain risk and return patterns across markets and through time. A bit like the investing equivalent to DNA, these factors play a part in all portfolios, whether or not a factor approach is used. Including factors in portfolio analysis reveals relevant and actionable information. We believe factor investing has the potential to drive outperformance supporting a better risk-adjusted trade-off within a truly diversified portfolio.

To understand this concept more, it might help to think of your favourite football team: You know the team’s strengths and weaknesses: The team’s defence is solid, and the goalkeeper is one of the best in the league; but there is no play-maker in midfield, and your very expensive striker is in the middle of a goal drought.

These elements of the team - the players, their formation, even the crowd’s support - are similar to investment factors. They are what drives the team’s performance and what makes the difference between winning and losing games. Get these factors right enough of the time, and the team can win the title.

While you won’t often hear our fund managers chanting the name of their favourite security, there are parallels with this analogy that might be useful in understanding factors. Just as the football team’s performance is determined by getting the right combination of players on the pitch for a game, so to the performance of an investment portfolio is influenced by its underlying factors. Understanding what these are, and in which situation each might perform best, can, we believe, lead to long-term outcome-oriented returns.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.