Factor Based Investing

Understanding Smart Beta or Factor Based Investing

WHAT IS Factor Based INVESTING?

Factor Based Investing uses an evidence-based approach to holistic financial planning and investment management.

You may have heard about investment and financial planning strategies that combine elements of both active and passive investing, often referred to as ‘smart beta’.
Some try to outperform broad market indexes, while others focus more on generating income. Nearly all try to reduce volatility and risk.

Investments have traditionally focused on “asset classes”—such as equities, or fixed income, or real estate, or commodities, or private equity. However, every asset class is made up of multiple factors driving risk and return. If asset classes can be thought of as complex molecules, factors are the atoms that serve as building blocks.

How does Smart Beta Investing Work?

Index investing typically looks only at a company’s size. “Smart beta” tends to look at additional factors, most commonly:

SIZE

Small-cap stocks are more volatile but tend to outperform large-cap stocks over the long haul.

VALUE

Factor-based investors rely on a multifactor approach to assessing value beyond earnings per share.

PROFITABILITY

Is a company historically profitable? What’s the forecast for a company’s future profitability?

MOMENTUM

When a stock has been outperforming, it catches other investors’ attention, who “pile on” and increase its momentum.

QUALITY

For example, it has a superior product, better customer service, or a lower cost structure.

VOLATILITY

Low-volatility portfolios outperform the broader market over time and provide a smoother ride along the way.

ENVIRONMENTAL

How companies deal with international, national, and regional environmental regulatory requirements can say a lot about their ability to adapt to a rapidly changing world. Is the company taking unnecessary risks about regulations, compliance, and best practices that open it up to risk in the long-term? While a Board may decide that the benefits outweigh the risks, an investor may not.

SOCIAL

Social factors deal with three sub-areas that can impact a company’s profitability and long-term adaptability. Consumers: customer satisfaction, data protection & privacy; Employees: employee engagement and retention, leadership, labor practices, and employment standards; Outsiders: community relations, and relationships with other industries.

GOVERNANCE

How well are these companies run? Looks at boards of directors, their audit committee structure, their record on bribery and corruption, how they compensate executives, and how they deal with whistleblowers. We expect that “good governance” leads to better-run companies, producing returns that are in line with—or are sometimes even better than—the rest of the market.

HOW DOES PASSPORT WEALTH MANAGEMENT HELP WITH FACTOR BASED INVESTING?

More than 600 factors have been identified as potential indicators for smart beta or factor based investing. Evaluating these factors and understanding them is critical to making decisions that can potentially reduce risk and improve returns.

That’s where Passport Wealth Management’s expertise is invaluable.

Does Smart Beta Investing Work?

Factor based investing, or smart beta funds, are designed to provide investors with a way to consistently evaluate market factors with the goal of increasing the diversity of a portfolio across different factors to reduce risk. Research shows that Smart Beta investing may create the potential for reduced risk and improved returns.

Are all Smart Beta Funds Good?

No category of funds is good across the board all the time. To properly analyze whether a fund is “good” or has the potential to minimize risk for an individual investor or family, it is important to work with a CFP® Professional who understands how these funds differ from their more traditional counterparts. It is important to know what a fund holds and evaluate that based on your financial goals.

Explanation of Factor Based Investing. Provided by Dimensional Fund Advisors.

Discuss Factor Based Investing with Passport Wealth Management.

Schedule a Consultation

EXPLORE

This is our opportunity to sit down and discuss what matters to you and the challenges you’re facing. We need to understand who you are and what makes you tick before working with you to develop your plan.

STRATEGIZE

Tell us your goals and recommend how you achieve them from a financial standpoint. This might include changes to how you’ve managed your investments in the past, tax planning strategies and your estate.

IMPLEMENT

We take the action steps from the strategy and execute them. Many of these items will be taken care of together. Others may require us to include other professionals, such as your CPA, insurance agent, or your estate attorney.

ADAPT

Over time your goals and needs may change. Your financial plan must adapt to this change. We’ll reassess your strategy together and adapt your financial plan to achieve your new goals. This may include revising estate documents or insurance plans.