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Factor Based Investing

June 3, 2020

An Attractive, Low Cost Strategy to Meet Your Long-Term Goals

What is an Investment Factor? 

An investment factor is a characteristic relating a group of securities and explains to a large degree, the risk and return of those securities.

Why Should You Incorporate Factor Based Investing into Your Portfolio?

A factor-based investment strategy has the potential to produce better risk adjusted returns compared to other strategies, often at lower costs than mutual funds or managed accounts.

What Factors Should You Invest In?

The factors you choose depend on your investment objectives. There are a number of factors with a history of success you might be interested in: Low Volatility, Value, Momentum, Dividends, and Liquidity.Value and Momentum factors, combined, have a history of lowering volatility,and producing attractive risk-adjusted returns.

How Can You Invest in a Factor Based Investment Strategy?

Many Exchange Traded Funds (ETFs) express factor based investment strategies with management expense ratios in the range of 0.3% to 0.7%. If you were in a fee based account with a fee of 1.2% and ETFs averaging 0.5% management fee, your combined fee management fees would be approximately 1.7% – ½%to 1% lower than a typical mutual fund.

An investor looking for a globally diversified Momentum and Value Strategy with an emphasis on Canada might choose for ETFs to express the strategy:

factor based portfolio chart

Principles of Investment Success

Goals: Create clear, appropriate investment goals.

Balance: Develop a suitable asset allocation using broadly diversified ETFs and funds. Use diversified holdings to avoid exposure to unnecessary risks. Avoid portfolios of individual stocks, selected by yourself or a portfolio manager.

Cost: Markets are unpredictable. Costs like mutual fund fees and taxes are forever. The lower your costs, the greater your share of an investment's return.

Discipline: Discipline and perspective can help you remain committed to a long-term investment program through periods of market uncertainty.

References and Further Reading

First Asset International Equity Strategy, Creating a Better Blend (available upon request). This one pagedocument highlights a strategy combining Momentum and Value factors.

MSCI Research Insight: Foundations of Factor Investing. https://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf

Momentum and Value Everywhere, Clifford S. Asness, Tobias J. Moskowitz, and Lasse Heje PedersenThe Journal of Finance VOL. LXVIII, No. Three, June 2013. http://pages.stern.nyu.edu/~lpederse/papers/ValMomEverywhere.pdf

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