Five factor investing mistakes – and how to navigate them

Factor portfolios – what are they good for?

Factors break asset classes down into their component drivers, such as fundamental factors (value and quality) or market factors (momentum and low volatility). The use of factors enhances understanding of portfolio risk and the potential clusters of risk that can go unnoticed. These factors can then be put into portfolios as single factors or combined into portfolios, called multi-factor portfolios. Factor analysis can be used to analyze any multi-asset portfolio to better understand the hidden exposures that may lie within it.

While research into factors has been around since the early 1960s, the use of factor portfolios has accelerated over the last five years or so. They are used for a variety of reasons – a cheap alternative to active management and exposure to specific factors to name a couple.

The explosive growth of exchange-traded funds (ETFs) and increased use of derivative instruments has made it easier for asset owners and asset managers to gain (and change) exposures to factors, sectors and asset classes. However, just because there is an increased availability of implementation options doesn’t mean that they should be used with impunity.  

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.