Factor investing uses clear, measurable traits to select shares. Data-based rules become the replacement of opinion. It is being utilised through index-linked products and portfolios driven by rules.
Investors are not relying on predictions but instead on transparency and discipline, allowing them to diversify their exposure to various factors by employing
multi-factor models.
What are the Factors
A factor is a characteristic that helps explain how a share behaves. Widely used factors include:
- Value: Companies trading at lower prices relative to fundamentals.
- Quality: Stronger profitability and cleaner balance sheets.
- Momentum: Shares that have been trending positively over a set look-back period.
- Low volatility: Steadier price moves than the broad market.
- Size: Tilts towards smaller companies with different risk and liquidity profiles.
No single factor leads all the time. Markets move in phases, which is why investors often blend them through multi-factor models to smooth the experience across cycles.
How Multi-Factor Models Work
They combine complementary factors in a rules-based portfolio to balance exposures and keep selection disciplined.
Building the Rulebook
Every systematic strategy begins with clear definitions. Decide which traits matter, how they will be measured, and how much emphasis each will receive. For example, an investor might combine quality, value and low volatility, with each company scored on these traits. The rules should be written down, easy to audit and free from hindsight bias.
Choosing the Investable Universe
A disciplined process starts with a liquid, tradable list of equities. Many strategies focus on broad-market or large- and mid-cap sets so positions can be executed responsibly. Basic exclusions and governance checks are standard, helping avoid names that fail minimum disclosure or liquidity standards.
Scoring, Blending and Weighting
Each company receives a score for the selected factors. Scores are then blended to form a composite that reflects the overall philosophy of the model. Portfolio weights can be equal or linked to the composite score, with sensible limits by stock and sector to control concentration. The aim is consistency: hold the names that best express the chosen traits, not the ones making the loudest headlines.
Rebalancing With Discipline
Companies change, and markets evolve; the portfolio is refreshed on a defined schedule. Rebalancing keeps exposures aligned with the factor definitions but also introduces trading costs and potential tax events. Robust processes weigh purity of exposure against turnover, so the approach remains investable in real-world market conditions.
Ways Investors Access Factor Exposure
Investors can access curated stock baskets indirectly via index funds and ETFs, and through DIY screening for skilled investors.
- Index-linked paths: Rules-based funds and exchange-traded products allied to single-factor and mixed strategies are the ones that are considered to be the most popular and easiest to access. The rulebook is public, which acts as a helping hand for the investors in knowing the philosophy and the boundaries of the investments.
- Curated stock baskets: Broker platforms and research providers usually release structured baskets that consist of shares grouped according to specific rules or themes, including factor-based ones. Such baskets create a guided but not quite a direct path, as they still require some building of screens from scratch.
- Do-it-yourself screens: Skilled investors can operate their own filters for value, quality, momentum, etc., and then apply risk limits and rebalancing policies. This method requires a lot of time, strictness, and a good understanding of how rules interact with different market conditions.
Benefits and Trade-Offs to Weigh
Weigh diversification benefits against costs, risks, and cyclical underperformance.
Why Investors Consider Factors
They provide transparent, rules-based selection and diversify return drivers through multi-factor models.
- Transparent, rules-based selection instead of opaque stock-picking.
- Better diversification of return drivers when several traits are combined through multi-factor models.
- A framework that can be communicated to investment committees, clients or family members without heavy jargon.
How to Evaluate a Factor or Multi-Factor Approach
Before allocating capital, look for:
- Construction discipline: Position caps, sector limits and liquidity thresholds suited to local market realities.
- Rebalancing policy: A disclosed schedule that balances exposure accuracy with turnover.
- Operational quality: Adherence to applicable regulations, strong disclosures, and an accountable review process.
- Total cost view: Expenses plus estimated trading frictions, not fees alone.
Who Might Consider Factor Investing
Factor strategies suit investors who want a straightforward, rules-first process and can accept periods of underperformance versus headline indices. For a steadier experience, many favour multi-factor models that diversify across traits. Always align any approach with your goals, risk tolerance, time horizon and tax situation, and consult a qualified adviser.
Final Thoughts
Factor investing is about process over prediction. Define the traits, apply them consistently, and rebalance with care. If you value transparency and want an approach you can articulate in a few sentences, factor-based portfolios, especially thoughtfully designed multi-factor models, deserve a place on your research list. Keep expectations grounded, focus on the rulebook.