Factor Investing

Factor Investing is a systematic investment approach that targets specific drivers of return—known as factors—across asset classes. Instead of focusing on traditional sectors or geography, factor investing analyzes the underlying characteristics of securities.

The most commonly recognized equity factors include Value (cheap vs. expensive), Size (small vs. large companies), Momentum (recent winners vs. losers), Quality (high profitability vs. low profitability), and Low Volatility.

Academic research, heavily influenced by Eugene Fama and Kenneth French, has shown that these factors historically provide a persistent premium over the broad market return, compensating investors for bearing specific systemic risks or exploiting behavioral anomalies.

Modern portfolios, such as the Larry Portfolio or the Golden Butterfly, use factor tilts—particularly towards Small-Cap Value—to engineer specific risk-return profiles that differ from standard market-cap-weighted indices.