Factor investing is an investment strategy that involves targeting specific drivers of returns across asset classes. We offer several reasons why you might consider using factor investing as an individual investor.
Factor Investing
Investors often employ strategies that seek to exploit factors that have historically performed well, they believe will outperform in the future or a combination of both. In The Prudent Speculator’s case, we have invested in the Value factor (the opposite group would be Growth) and Dividend-Paying factor (opposite would be Non-Payers). These factors since the 1920’s have performed well.
Factor Investing Key Points
Investors may find factor investing attractive for many reasons including:
1. Enhanced Return Potential
One may wish to capture “risk premia” (the amount a risky asset is expected to outperform a risk-free asset) associated with specific factors, including Value, Size, Momentum, Quality and Volatility.
2. Diversification & Risk Management
Factor investing can help an investor limit or seek exposure to a certain area. An investor may seek to reduce portfolio fluctuations by investing in Low-Volatility securities, while others may seek out Momentum strategies if they believe they can maximize their return.
3. Historical Evidence
Factor investing is often grounded in academic research and empirical evidence. We lean on long-term factor research and corroborate it with our own research, while also constantly seeking to broaden our universe and search for new ideas.
4. Alignment with Investment Goals
There are a large number of factors and each investor will have their own ideas about which factors make sense for their portfolio. For example, a Dividend-Paying factor may appeal to investors seeking income, while a Size factor may appeal to those looking for company growth and capital appreciation.
Conclusion
The chart below shows year-to-date factor returns and highlights that there can be broad differences in performance simply by splitting stocks into different groups.
While factor investing can be a powerful tool for enhancing returns, managing risk and improving diversification, it is important to consider that all factors are not equal when it comes to those aims. Importantly, managing factor exposures within a portfolio will help ensure that your portfolio is constructed to meet your personal goals.
Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.