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Factor-based investing for everyone

13 February 2020 in Inside Motif

Tilting your portfolio, or weighing your holdings toward a certain strategy, has been around for decades. Rooted in a larger investing concept known as factor-based investing, the strategy is often used by institutional investors on everything from hedge funds to pension funds.

Now individual investors can benefit from factor-based investing too, with Motif 500 Portfolio Tilts.

A new take on an old idea
Let’s go back to the beginning. Factor based investing takes root in the work of Eugene Fama and Kenneth French developed in 1992. At its core, this approach looks under the hood of each portfolio to identify opportunities to tailor the risks and returns of the underlying securities through the lens of factors. Among the key tilts widely used in factor strategies include value, momentum, and low volatility.

 

What is Factor-based investing?
Factor-based investing is an approach to investment that selects securities based on attributes that have been correlated with higher returns. Factors provide a way to help see beyond short-term trends, sector performance, and traditional asset allocation to focus on the broader and more persistent characteristics that affect differences in stock returns.

 

Factor-based investing fans
In recent years, these factors have found new appeal to advisors and retail investors alike. A recent survey of fund managers in North America found that 65% planned to increase their allocations to factor-based investing over the next three years.(1) And according to a recent report by Morningstar Inc., almost $800 billion is now invested in nearly 1,500 factor-based exchange-traded products, up from approximately $600 billion two years ago.

This strategy continues to gain traction because investors are looking for an alternative to market-weighted index funds and a better way to understand the source of their returns. Factors offer this transparency; investors can tailor the portfolio to their risk appetite and return objectives.

To help you get access with low cost, we have introduced Motif 500 Portfolio Tilts. These portfolios offer factor-based strategies while providing all the benefits of direct indexing.

How to “Tilt” your Motif 500 portfolio

You can easily adjust your Motif 500 portfolio by choosing a ‘Tilt’ that matches your portfolio goal when opening a new Direct Index account.

Motif offers four tilts to bring factor-based and value-based investing into your portfolio:

  Value For bargain hunters, this tilt screens for the most undervalued stocks based on their price-to-book ratio
  Low Volatility For those keen to avoid market turbulence, this tilt finds the stocks with the lowest price fluctuations from its last annual rebalance.
  Momentum This tilt captures the stocks that have generated the highest returns from its last annual rebalance. In contrast to value tilt’s “buy low, sell high” mantra, the momentum tilt is about “buying high, selling higher.”
  Sustainability This tilt identifies the companies that score the highest Environmental, Social and Governance (ESG) ratings according to MSCI. In case you’re asking whether good corporate citizenry goes hand-in-hand with good financial performance, the answer is that there is a growing body of research that seems to affirm this.

 

Sources:
(1) Invesco Global Factor Investor Study 2019

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