Factor Investing In Equities and Corporate Bonds: Neutralising Bias

27 Nov 2019

Factor investing is about using style factors such as value, quality, momentum or low risk to tilt portfolios in favour of cheaper (value) outperforming (momentum) stocks or corporate bonds from the most profitable and better managed (quality), less risky companies (low risk). Such an approach is based on strong academic and empirical evidence that these stocks and corporate bonds should deliver the highest risk-adjusted returns.

But the construction of a portfolio can make a huge difference in terms of performance, Why? Because style factors are not the only factors that explain stock and corporate bond returns. Making sure that other factors do not pollute your portfolio can make all the difference.

Here is a summary of the some of the key factors that explain stock and corporate bond returns and a brief explanation of why this is the case, along with an illustration of how costly poorly-constructed equity and corporate bond factor-based portfolios can be.

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