Investing Ideas

Combining factors to target specific investment outcomes

The potential merits of a factor-based approach to portfolio construction.

By: Bobby Barnes Scott O’Reilly Kevin Robertson
Updated: 10/3/2023
Key Takeaways
  • When building portfolios with factors, investors can harness the risk and return characteristics of the individual factors themselves and achieve diversification by combining them.
  • History suggests that a portfolio of six equity factors weighted equally has exhibited compelling results, including positive excess and higher risk-adjusted returns relative to the broader equity market.
  • Equity factor allocations may also be fine-tuned to target specific outcomes, such as capital appreciation, downside protection, and income.
  • Factor combinations can be used to create a core equity portfolio from the ground up, or to complement existing holdings.
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Diversification and asset allocation do not ensure a profit or guarantee against loss.

There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how a factor investment strategy may differ from a more traditional index-based or actively managed approach. Depending on market conditions, factor-based investments may underperform compared to investments that seek to track a market-capitalization-weighted index or investments that employ full active management.

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