Multi-factor investing is a cost-effective investment approach that can complement active or passive allocations. It can help generate incremental returns while managing portfolio risk.
Multi-Factor Solutions
Cost-effective, actively managed solutions
Contact usMulti-factor investing is a complement to any investing strategy, designed to harness incremental returns while seeking to manage risks and costs.
Factors
Factors are the underlying characteristics that drive returns of stocks, bonds and other assets. For instance, Value, Momentum, Quality and Low Volatility are four common equity factors that have the potential to deliver excess returns over the broad market. Factor investing targets exposure to these factors to help maximize a portfolio’s return and manage its risk.
Value
Value investment strategies involve identifying companies that are trading at a discount to fair value of the broader market.
Quality
Quality investment strategies focus on identifying companies that deliver sustainable returns to shareholders. Typically characterized by high profitability, low leverage and low earnings volatility.
Momentum
Momentum investment strategies focus on identifying those stocks with strong performance, with the expectation that the strong performance will continue.
Low Volatility
Low-volatility based investment strategies focus on identifying companies that have more stable return patterns than the broader market.
Growth Strategies
Growth strategies focus on stocks that exhibit higher historical and forecasted growth rates, as measured by fundamental measures such as earnings and sales, relative to the broader market. Size strategies focus on stocks with a lower market capitalization.
Our factor investing approach
At Russell Investments1, we understand factor investing—it’s been one of our core capabilities for more than 40 years. We believe there are three key components to a successful multi-factor strategy:
1. Identifying and understanding multiple factors
Early adopters of factor investing focused on portfolios targeting a single factor to more reliably realize a desired exposure. However, factors can be volatile and present unique risks to investors given their highly cyclical nature.
Although each individual factor’s excess returns are expected to be positive in the long run, they are not consistently positive over shorter time horizons and fall in and out of favor at different times throughout the market cycle.
Combining multiple factors in a single portfolio may help provide more consistent performance over time, especially given that the performance cycles of the most common factors have not historically coincided with each other—when one factor is underperforming, another factor may be outperforming.
2. Thoughtful portfolio construction
Combining multiple factors within a portfolio requires careful consideration—just as diversifying across various asset classes does—so that the components complement each other. A simplistic multi-factor portfolio would equally weight each factor. However, our research shows that optimizing risk-adjusted returns requires an understanding of each factor’s behavior under different economic regimes. For example,
- The Value factor has tended to start performing well at market bottoms.
- The Momentum factor has typically started performing well at or near market peaks.
- The Quality factor has been the most stable in terms of returns, though it tends to perform better during recessions.
- The Low Volatility factor has demonstrated the strongest counter-cyclical pattern.
- The Growth factor has tended to perform well during periods of weaker economic growth.
We use this insight to thoughtfully construct the strategic factor weights for our multi-factor portfolios: 27% Value, 22% Momentum, 23% Quality, 12% Growth and 16% Low Volatility. These weights become the starting point for our Portfolio Managers to dynamically manage our multi-factor portfolios.
3. Dynamically managing factor exposures
Markets are not static and conditions are constantly evolving, causing the attractiveness of any one factor to vary. Therefore, our Portfolio Managers actively adjust individual factor weights, based on our manager research insights and strategists’ capital market views on the business cycle, valuations and market sentiment. For example, the Portfolio Managers may increase the Value exposure near market bottoms as equities are seemingly set to rebound. Conversely, Quality may be emphasized in a weak or recessionary environment.
Dynamically-managed factor exposures based on market cycle
Russell Investments (RI) does not believe in a return premium to the Growth factor through the entire cycle, so it is not included in our ‘strategic factors’ above. However, RI believes there are appropriate times to allocate to Growth within certain phases of the cycle as a valuable analogue to allocations to the Value factor. RI does not believe in a premium to smaller size, but does believe that active management, and factor exposures, are more powerful in smaller cap stocks.
Russell Investments’ Multi-Factor Solutions
At Russell Investments we actively manage across multiple factors with the aim of generating incremental returns while managing overall risk.
Discover our four cost-effective, actively managed multi-factor solutions:
Related Materials Multi-Factor Brochure
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FAQs
Value, Momentum, Quality and Low Volatility are four common equity factors that have the potential to deliver excess returns over the broad market. Factor investing targets exposure to these factors to help maximize a portfolio’s return and manage its risk.
The benefit of multi-factor investing is that it can enhance returns and help manage risks. A successful strategy will focus on multiple factors (versus single factors) as although each individual factor’s excess returns are expected to be positive in the long run, they are not consistently positive over shorter time horizons. Factors can fall in and out of favor at different times throughout the market cycle. Combining multiple factors in a single portfolio may help provide more consistent performance over time.
At Russell Investments, we believe there are three key components to a successful multi-factor strategy: 1) Identifying and understanding multiple factors, 2) Thoughtful portfolio construction and 3) Dynamically managing factor exposures.
Factors are the underlying characteristics that drive returns of stocks, bonds and other assets. For instance, Value, Momentum, Quality and Low Volatility are four common equity factors that have the potential to deliver excess returns over the broad market. Factor investing targets exposure to these factors to help maximize a portfolio’s return and manage its risk.
1Russell Investments Canada Limited, backed by the larger Russell Investments, benefits from these global capabilities.