Factors by MSCI
MSCI has developed Factor Indexes, FaCS and Analytics backed by four decades of Factor research and innovation.
Factors are the building blocks of many portfolios —the elements capable of turning data points into actionable insights.
In the realm of investing, a factor is any characteristic that can explain the risk and return performance of an asset. For over 40 years MSCI, starting with Barra, has researched factors to determine their effects on long term equity performance. MSCI has developed Factor Indexes and Factor Models in consultation with the world’s largest investors and has research backed by four decades of Factor data compiled by a 200+ global research team.
MSCI has been a leader in factors for over 40 years. Explore the history of MSCI factors below.
The Capital Asset Pricing model attempted to measure how the risk of an investment may affect its expected return. The measurement of the sensitivity of a security to the broader market was called Beta
MSCI was a pioneer in developing the market for global equity indexes. We began licensing our first equity index products in 1969
Refining CAPM to create low volatility factor investing, demonstrated that stock portfolios with lower volatility tend to produce higher returns on average
Creation of the
multi-factor Barra risk models
Introduced the Arbitrage Pricing Theory (APT) - credited with original term "Factors" and
Low Volatility Theory
Academic Asset Pricing Literature and Practitioner risk factor modeling research
Suggested that Macroeconomic factors can systematically affect stock market returns
First generation Barra fixed income factor model launched
First generation MSCI Global Equity Model (GEM) launched
Expanded on the Rational Market Theory to demonstrate that company size and valuation factors are drivers of stock price
Published first research on Momentum factor
RiskMetrics methodology was launched by J.P. Morgan
Expanded on Fama-French three-factor model to include momentum factor, creating the Carhart four-factor model
MSCI acquired Barra, a provider of portfolio risk analytics tools that launched its first risk analytics products in 1975
MSCI acquired RiskMetrics Group, a leading provider of risk management and governance products and services.
Fourth generation Barra fixed income factor models launched
MSCI launches MSCI FaCS and Factor Box, an industry standard and factor classification for consistent implementation and measurement for Factor Investing
Factors have historically been identified as critical drivers of portfolio risk and return and can now be used to better inform the investment process. Factors may help investors meet their objectives such as reducing risk, increasing returns, and increasing diversification by providing a better understanding of risk and returns.
|Factor Groups||What it is|
Relatively Inexpensive Stocks
|Captures excess returns to stocks that have low prices relative to their fundamental value|
|Low Size (Small Cap) |
|Captures excess returns of smaller firms (by market capitalization) relative to their larger counterparts|
|Reflects excess returns to stocks with stronger past performance|
|Low Volatility |
Lower Risk Stocks
|Captures excess returns to stocks with lower than average volatility, beta, and/or idiosyncratic risk|
|Dividend Yield |
Cash Flow Paid Out
|Captures excess returns to stocks that have higher-than-average dividend yields|
Sound Balance Sheet Stocks
|Captures excess returns to stocks that are characterized by low debt, stable earnings growth, and other “quality” metrics|
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MSCI Factor Indexes are designed to help institutional investors seeking to capture the excess return of factors in a cost-effective and transparent manner. Factor indexes can be used to implement factors through a passive portfolio. A factor index can also bring transparency to factor allocations, helping to alleviate the well-known problem of manager style drift and may have positive implications for risk management.
Due to the historical cyclicality of factors, investors may choose to diversify away from a single factor but do not want to dilute their exposure to their targeted factors or change the risk profile of their portfolios. MSCI’s Multiple-Factor Indexes provide building blocks that allow investors to assemble multiple-factor allocations based on their objectives for risk and return, their investment beliefs on individual factors, and their investability constraints.
Learn more about MSCI Factor Indexes below or read more about Factors by MSCI in our Additional Resources.
Based on MSCI’s Global Equity Factor Model, MSCI FaCS includes 8 Factor Groups, and 16 Factors.
Factor Investing is transforming the way investors construct and manage portfolios. The increasing popularity of Factor Investing can create the need for standards.
MSCI has been at the forefront of driving factor innovation for over 40 years, beginning with Barra, which established a common language to explain risk and return through the lens of factors.
MSCI FaCS and MSCI Factor Box are designed to provide the structure and standardization for evaluating, implementing and reporting factor exposures.
It is well established that Factors have historically been key drivers of risk and return in equity portfolios. Our research (Roisenberg, 2017) suggests that industry, country, currency and style Factors account for approximately 55% of the active return of a sample of approximately 882 actively managed global mutual funds over the September 2003 – December 2016 period. Within the Factor contribution, style Factors made up the largest portion of active returns - 35%.
MSCI FaCS creates a common language and definitions around Factors to be used by a broader audience including asset owners, managers, advisors, consultants, and investors. Investment managers can use the framework to analyze and report Factor characteristics, while investors and consultants can use the data to compare funds using common Factor standard definitions.
The Factor Box is powered by MSCI FaCS, which creates a common language for Factor Investing. The Factor Box provides a visualization designed to easily compare Factor exposures between funds and benchmarks. It includes the 6 Factors which have historically demonstrated excess market returns over the long run.
The MSCI Factor Box aims to help investors identify Factor exposures compared to their intended benchmark. This may help investors to make better informed decisions on their fund selection, fund monitoring and holistic portfolio analysis based on their fund exposures and investment objectives.
Learn more about Factors by watching MSCI’s Factor Investing Webinar Series recording.
Whether building portfolios, implementing strategies, or measuring performance, MSCI helps clients identify and solve for implementing factors throughout the investment process. MSCI’s 70+ Equity Factor Models and 100+ Multi-Asset Class Models utilize MSCI’s factor classification standard that has a detailed hierarchy including three distinct layers, Factor Groups, Factors (Systematic Equity Strategies), and Factor Descriptors. Incorporating factor strategies in portfolio construction can help:
Learn more about MSCI Analytics.
MSCI helps clients build, implement and measure factor based strategies through consistent and transparent factor frameworks. As a leader in the application of factors for 40+ years, MSCI beginning with Barra invented a common language to explain risk and return through the lens of factors.
Explore the MSCI Global Factor Framework interactive below which provides transparency in to our Global Equity Factor Model – Long Term Horizon (GEMLT):
One of MSCI’s key competitive advantages is our research. We employ one of the largest research teams in our industry – which contains extensive academic credentials with broad financial and investment industry experience. We are dedicated to building the world’s finest index, portfolio construction and risk management tools – working on both developing new factor models and methodologies and enhancing existing ones.
MSCI‘s rich factor hierarchy is built from the ground-up from aggregated fundamental and technical data. This is based on extensive research to identify common drivers of risk and return and back tested for relevance across markets and investment strategies. Our in-house team of more than 150 researchers blends academic research with practical experience and is continuously innovating to introduce new factors into risk models.