Factor Investing

Factor investing is a systematic approach that targets specific characteristics, called factors, which have historically been associated with higher returns or lower risk. Common equity factors include Momentum, Value, Quality, and Low Volatility. Each factor represents a distinct economic or behavioral premium. For example, Momentum captures the tendency of winning stocks to keep outperforming, while Value focuses on companies trading at relatively low prices compared to fundamentals. Quality emphasizes financially strong businesses, and Low Volatility seeks smoother return profiles. In practice, factor investing involves ranking stocks based on measurable metrics tied to each factor and constructing portfolios that tilt toward the strongest candidates. Unlike traditional stock picking, factor strategies are rule-based and transparent. One of the strengths of factor investing is diversification across return drivers. Different factors perform well in different market environments. Momentum often excels in trending markets, while Quality and Low Volatility tend to hold up better during drawdowns. Combining multiple factors can therefore help smooth portfolio performance over time. A common misconception is that factors work consistently every year. In reality, factor returns are cyclical and can underperform for extended periods. This makes discipline and long-term commitment essential. Successful factor investing also requires careful implementation, including liquidity filters, sector controls, and turnover management. Without these, theoretical factor returns may not translate into real-world results. Ultimately, factor investing provides a structured framework for capturing well-documented market anomalies while maintaining diversification and risk control.