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Factor-based investing: a quick history
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By Fund Library News Wire  | Tuesday, December 19, 2017



By Jay Bhutani, Senior Vice-President, AGF Investments Inc.

In 1992, Major League Baseball’s Oakland A’s pioneered the combination of traditional scouting practices with statistical analysis of players. Like baseball, investing contains a wealth of data and metrics which can be analyzed to inform decisions.

In investing, isolating the characteristics of a security associated with higher returns is referred to as factor investing.

Factor-based approaches to investing have, in recent years, gained significant attention; however, the concepts guiding these approaches have been around for some time. Many fundamental attributes of companies and securities have shown to be correlated with past stock returns and so are expected to be correlated with future returns.

The basis of Modern Portfolio Theory has long been centered around the Capital Asset Pricing Model (CAPM) originated by William Sharpe and Harry Markowitz. Sharpe and Markowitz identified beta as a factor that was instrumental to a stock’s return. Beta is arguably the best-known factor and the one every investor gains exposure to, whether intentionally or not, when allocating to equity securities.

Countless academic studies have since expounded on the groundbreaking CAPM, noting that other identifiable investment factors yielded significant premiums.

Many investment professionals have used factors to pick stocks from the very beginning. Warren Buffet isn’t thought of as a factor investor, but his focus on identifying stocks trading at a discount to their intrinsic value, based on Benjamin Graham and David Dodd’s work in 1934, makes the legendary investor one of the early adopters.

Extensive academic research has confirmed the value factor has proven to be effective in identifying stocks that are expected to outperform.

As the volume of company data expanded, and academic research intensified, the number of factors increased as Eugene Fama and Kenneth French developed a three-factor model which included value, beta, as well as size. Size refers to the historical precedent that small-cap stocks have outperformed large-cap stocks over the long-term.

The conventional wisdom with regard to timing small-cap stock investing is that U.S. small-cap stocks have historically outperformed large-cap stocks during rising rate environments. But performance is cyclical and periods of underperformance can be long.

Today the list of factors has expanded to include low volatility and momentum.

In 2005, the term “fundamental indexation” was coined, which attempted to redefine a company’s weighting in an index based on an attribute other than market capitalization, while smart beta tilted the index to potentially improve returns and/ or reduce risk through the application of rules.

Individually, each factor can provide investors with long-term performance, but research has demonstrated that individual factor performance will vary considerably based on market cycle and can lead to a volatile, uneven ride.

Why multi-factor investing?

Over time, factor-based investing has evolved from identifying individual factors to combining multiple factors in a disciplined investment process.

Multi-factor strategies can capture the opportunities provided by a factor-based approach, but also manage risk and volatility. Factor exposures can be managed to provide a smoother ride for investors across different sectors, regions, and asset classes. This ongoing evolution provides investors opportunities to incorporate factor-based strategies into their portfolios.

Jay Bhutani is Senior Vice-President, Head of ETF Strategy at AGF Investments Inc. This article first appeared in the Fall 2017 issue of Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

AGFiQ Asset Management (AGFiQ) is a collaboration of investment professionals from Highstreet Asset Management Inc. (HAMI), a Canadian registered portfolio manager, and of FFCM, LLC (FFCM), a U.S registered adviser. This collaboration makes up the quantitative investment team.

QuantShares are ETFs offered by AGF Investments Inc. and managed by Highstreet Asset Management. QuantShares ETFs are listed on the Toronto Stock Exchange and may only be bought and sold through licensed dealers.

Commissions, trailing commissions, management fees and expenses all may be associated with investing in the QuantShares ETFs. Please read the relevant prospectus before investing. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other such decisions should be made, as appropriate, only with guidance from a qualified professional. There is no guarantee that QuantShares ETFs will achieve their stated objectives and there is risk involved in investing in the ETFs. The risks associated with each QuantShares ETF are detailed in the prospectus. Before investing, consider carefully each ETF’s investment objectives, risks, charges and expenses, found in in the prospectus. Please read the prospectus carefully before investing. A copy is available on

Findings from Professor Ken French, of Dartmouth College, data and research were incorporated into these materials for illustrative purposes only. The content is not specific to the QuantShares ETFs, is not a guarantee of future results and should not be considered as investment advice or an offer or solicitation to trade in QuantShares ETFs. Investment and other similar decisions should be made with guidance from a qualified professional based on personal circumstances. Publication date: October 9, 2017

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