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Did You Know You’re Already a Factor Investor?

Your investments are already exposed to factors, so if your outcomes aren’t what you want, it may be time to factor them in.

People at a table work on their laptops representing factor investing and meeting portfolio objectives.

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talking points

01

Factors may be driving your portfolio’s performance.

02

Knowing what factors are and what they can do gives you an important lens through which to view your portfolio.

03

Assessing your current factor exposures is key to making them work for you.

You’ve looked at the performance of your investments before making your choices. And you’ve taken into account their risk. You’ve done the research. But your outcomes aren’t quite what you expected and you’re not sure why. Have you factored in everything?

Whether you’re aware of them or not, factors are a part of your investments. So what is a factor? Well, it’s a characteristic of an investment that can be measured and tracked, to help explain its performance. This goes deeper than traditional categories such as sector or region.

To understand, think of your morning coffee.

Every day you drink a cup of coffee, and 30 minutes later you feel awake and alert.

But one day you drink your coffee, and 30 minutes later you still feel tired and have a headache coming on. Why didn’t you get your expected outcome? Because the barista accidently gave you a decaf. Whether you were aware of it or not, caffeine was the factor that gave you your morning energy. Some coffees have it, and others don’t — and you can’t tell just by glancing at the cup.

While investing is more complex than sipping coffee, of course, this analogy can help you understand factors. They’re the underlying traits that can help influence an investment’s performance.

What Are These Factors And What Do They Do?

This chart highlights a few of the factors that can affect stock performance. All factors have the potential to outperform the broad market, but they have historically done so during different types of market conditions.

Remember that factors are already influencing your investments — understanding why they exist and what they can do is the first step to making them work for you.

Factor What it is Why it exists
Value Applies to investments trading at discounts to similar securities, based on measures like book value, earnings or cash flow. Investors tend to overreact to negative news and have a preference for stocks with rising prices.
Size Represents the potential higher-than-benchmark returns associated with relatively smaller stocks within the universe being considered. Investors tend to prefer larger stocks and may be rewarded for the reduced liquidity and transparency of relatively smaller stocks.
Momentum Identifies investments with positive momentum (recent strong returns) or negative momentum (recent weak returns) to calibrate portfolio exposure to either. Investors tend to over/under-react to market events, which may perpetuate price trends.
Low Volatility Describes investments that consistently demonstrated lower volatility than securities in the same asset class. Lottery effect (preference for stocks that seem to offer excess return potential) has historically created an anomalous relationship between risk and reward.
Quality Characterizes companies with strong measures of financial health, including a strong balance sheet. Investors tend to focus on reported earnings rather than other measures of financial health.
Dividend Yield Reflects investments defined by higher-yielding assets with higher total returns over time than lower-yielding assets. Dividend payments may provide a more defensive investment approach.

Updating your Portfolio with Factors

Now that you know about factors, how do you incorporate them into your portfolio? To start, you may want to consider a portfolio analysis tool to see how your investments stack up and where there may be gaps. Our Factor eXposure Tool can help, or you can contact us — let’s start a conversation.

Important Information
Past performance is not indicative of future results. This does not constitute a recommendation of any investment strategy for a particular investor. This is being provided for informational purposes only, is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in any investment making decision. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes that may explain differences in returns. There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain factors. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Factor investing may underperform cap-weighted benchmarks and increase portfolio risk. A common assumption in finance is that increasing a portfolio’s risk exposure should generate a higher return. In contrast, the low volatility anomaly refers to the observation that historically portfolios of lower-volatility stocks produced higher risk-adjusted returns than portfolios with high-volatility stocks. The Lottery Effect describes investor tendency to prefer stocks that may seem to offer excessive return potential. There is no guarantee that low-volatility stocks will provide low volatility. A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets. The momentum style of investing is subject to the risk that the securities may be more volatile than the market as a whole, or that the returns on securities that have previously exhibited price momentum are less than returns on other styles of investing. Investing in securities of small capitalization companies involves greater risk than customarily associated with investing in larger, more established companies. There can be no guarantee or assurance that companies will declare dividends in the future or that if declared, they will remain at current levels or increase over time.

Looking to Factor It In?

Get in touch and let us know how we can help.