Factor-based investing is one of the most commonly used strategies by professional investors today. Factors are variables that can help maximize investment returns over time through a systematic exploitation of available data for a particular asset.
For example, when evaluating stocks within a portfolio an asset manager may consider each stock’s size, value, or growth characteristics and then give them a score based on this evaluation. Each of these represents a type of factor that can provide valuable information for the portfolio manager with regards to the stock’s relative performance.
Factor investing has been around for almost 50 years, but has become more popular as investors have challenged assumptions about the efficiency of markets. Factor-based strategies are designed to identify persistent sources of outperformance and potential excess return from certain explanatory variables.