This page outlines Factor Based Investing. Please click here for a list of Passport Wealth Management’s financial planning services.
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.
“Smart Beta” and Index Investing
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 often rely on a multifactor approach to assessing value beyond earnings per share, such as cash flows and earnings yields)
- momentum (when a stock has been outperforming for a while, it catches other investors’ attention, who then “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).
More than 600 factors have been identified as potential indicators. Some factors are related to macroeconomic variables, others to asset characteristics. Some factors have risk-related explanations, others are attributed to behavioral considerations—and many have arguments for both. That’s where Passport Wealth Management’s expertise is invaluable.
To learn more about our investment planning services, and investment management philosophy, including factor-based investing, please contact Passport Wealth Management at (704) 457-0060. We work with financial planning clients around the world from our offices near Charlotte, NC.