The Factors model portfolios are globally-diversified and systematically tilted towards proven factors of returns. Academic research by Nobel Laureate Eugene Fama and Ken French shows that there are persistent and proven factors that drive expected returns of specific asset classes. By structuring investments around factors linked to differences in expected returns, the investments have the potential to outperform markets in the long-term.
The Factors model portfolios are launched in partnership with Dimensional Fund Advisors ("Dimensional"), a global leader and pioneer in systematic factor-based investing. Dimensional traces its origin to academia back in 1981, dedicating itself to translating academic insights on factor returns to real world investment strategy. It was founded by David Booth, (famous for putting his name on the Chicago University Booth School of Business), and advised by Eugene Fama, the father of the "efficient market hypothesis".
Factors investing is in essence an enhanced indexing strategy, looking to harness these systematic factors to outperform the benchmark index.
Proven factors of outperformance for equities and fixed income
In equities, the proven factors of returns are:
- Size: Smaller market cap companies tend to outperform those with larger market caps
- Value: Cheaper companies (measured by valuation metrics such as Price to Book) tend to outperform more expensive companies
- Quality: Companies of higher quality (measured by metrics such as profitability margin) tend to outperform less profitable companies
In fixed income, the proven factors of returns for fixed income are:
- Term: Longer duration bonds tend to outperform shorter duration bonds when the term spread is high (interest rate difference between longer dated and shorter dated government bonds)
- Credit: Lower quality bonds tend to outperform higher quality bonds when the credit spread (yield difference between a corporate bond and a government bond of the same maturity) is high
The Factors model portfolios are systematically tilted towards these proven factors of returns. Capturing returns does not involve predicting which stocks, bonds, or market areas are going to outperform in the future. Rather, the goal is to hold well-diversified portfolios that emphasise dimensions of higher expected returns and have low turnover.
Factors investing
Factors investing systematically gains exposure to the above set of factor premiums through a pure quantitative process. There is no qualitative overlay in the process, which means that fund managers make rules-based investing decisions.
Factors investing offers low-cost access to broad markets, which provides a base layer of expected returns from market returns (or “beta”). On top of that, they also gain exposure to the proven factors of returns, which are expected to generate higher risk-adjusted returns than the market over time.
Please note that Factors model portfolios are only available to Professional Investors only