Simple is Smart in Smart-Beta Investing

Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times. The factors studied and respective finds are as follows: Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the article explains, the highest-risk portion returned only 4.1 percent while the other four returned at least 10.9 percent. Momentum: Returns were volatile but, over time, […]

In Factor Investing, Integration is a Plus

Portfolio diversification is a known strategy for minimizing risk, but these efforts can be thwarted if the diversified securities react in a similar way to market conditions. Factor investing is designed to reduce this risk by adjusting holdings based on specific attributes, and returns have been shown to increase if several factors are combined. A recent article in Chief Investment Officer magazine asserts that how factors are combined also makes a difference in investment outcomes. Researchers at the global investment management firm AQR have found that rather than just “mixing” factors (eg. building one portfolio for value and a second […]

Factor Investing is Gaining Appeal

Many traditional investment portfolios are created by mixing asset classes to spread risk and optimize returns. However, the Financial Times recently reported on a growing shift by more sophisticated institutional investors toward a different approach referred to as “factor investing”. The idea behind factor investing is to break down securities into the fundamental issues that drive their returns, a methodology which requires investors to take a more granular approach than they would by selecting broader asset classes. Not unlike choosing the best foods to eat based on inherent nutrients rather than by food group, factor investing is intended to create a […]