Factors in focus: An overview (5/5)

In this series of videos for Sparrows Capital we’ve looked at four different investment risk factors — in other words, four specific attributes that explain the return and risk of securities over the long term.

The fifth and final video provides an overview of factor investing, and in it we ask:

How does it differ from quant investing and smart beta?

How has factor investing evolved over the years?

How strong is the case for adopting a factor investing strategy?

And how do you go about implementing such a strategy?

Based on academic research dating back more than 40 years, factor investing has steadily grown in popularity. That growth accelerated after the global financial crisis, as prominent institutional investors embraced more systematic approaches to portfolio construction.

Factor investing is typically confused with quant investing and smart beta, but there are important differences.

In a nutshell, factor investing is a form of quant investing that seeks to exploit academically-proven factor premiums. It can be implemented within and across many different asset classes.

Factors refer to certain security-specific attributes that explain the return and risk of a group of securities over the long term.

An important concept to grasp is that factor investing is not designed to beat the market, but to deliver higher risk-adjusted returns.

In other words, the aim is to minimise risk and maximise return.

Depending on their needs and priorities, investors can either seek higher returns or reduce potential losses.