Factor investing (FI), also known as smart beta investing, is an investment approach that aims to enhance portfolio performance by targeting specific factors or characteristics that drive returns in the market.
Rather than solely relying on traditional market capitalization-weighted indices, FI usually focuses on the factors of Value, Momentum, Quality, Size, Low Volatility, and in the case of the Analytical platform, also Trend.
By incorporating these factors into investment strategies, investors can potentially achieve better risk-adjusted returns than by traditional index investing. For example, excess returns can be achieved by investing in stocks with a low valuation ratio (value factor) or stocks that have shown strong price performance in the past (momentum factor).
Factor investing allows investors to express their investment views and beliefs systematically and transparently. By allocating to specific factors, investors can skew their portfolios towards factors they believe will outperform in the future.
Finally, factor investing provides a rules-based approach that can help remove emotional biases and human judgment from the investment process. This systematic approach helps ensure consistency and discipline in portfolio management.
Overall, FI is a dynamic and evolving investment approach aiming to capture specific market return drivers. By diversifying across factors and implementing a disciplined investment strategy, investors can potentially improve their portfolio performance and achieve their investment goals.