Factor Based Investing
Factor based investing is an investment approach that involves targeting quantifiable characteristics, or ‘factors’, that can explain differences in stock returns.
Since the early 1960s, the academic community has been on a quest to uncover the ‘secret sauce’ of investing – the characteristics of stocks and other securities that both explain performance and provide premiums above market returns.
A factor based investment strategy involves tilting portfolios towards and away from specific factors to generate long-term investment returns in excess of benchmarks. The approach is quantitative and based on observable data, such as stock prices and financial information, rather than on opinion or speculation.
Factors are simply a set of properties common to a broad set of securities. Contrary to popular belief, it is the exposure to these factors, and not fund management skill, that determines performance.
For a Factor to be considered it must be:
Factors in EBI’s portfolios
More than 600 factors have been identified so far, but only a handful meet all of the criteria above. EBI’s evidence based investing approach identifies five key factors which it uses within its portfolios.