Are Factors Too Complicated?

This is the third instalment of our ‘Fact(or) Fiction?’ series, which aims to debunk some common myths around factor investing.

In this instalment, we explore the simple concepts that underpin factor investing.

The basic concepts underpinning factor investing are remarkably simple and intuitive, contrasting the misconception of factors being highly specialized and complex. Consider for instance the simple definitions of some of the factors below:

When we look through this lens, it could be said that many investors are already instinctively factor investors, making strategic investment decisions based on their view of the market or in line with the outcomes they are seeking.

In fact, factors may be part of your everyday life as illustrated in the examples.

Simplifying the complex

Despite these straightforward foundations, measuring factor exposures and implementing factor strategies could be complex.

MSCI Factor Classification Standard (FaCS) is our transparent and intuitive framework for evaluating, implementing, and reporting factors in equity portfolios. MSCI FaCS visual representation, the MSCI Factor Box, is designed to provide investors the essential tools and common language for implementing factor investing strategies, providing an instant factor snapshot for any stock, index, or portfolio.

In the example below, MSCI FaCS and Factor Box provide a single standard measurement for a fund and its key competitors.

Using our tools, investors can compare these value funds and their respective underlying factor exposures relative to a value style benchmark, which is commonly used by active asset managers.

Are these value funds?

• Fund A is called a value fund; however, it has negative exposure to value.
• Fund B is also called a value fund; however, it has lower exposure to value than its benchmark.
• Value Fund C has higher exposure to value than both previous funds and an overweight to value relative to the benchmark.

Factor in MSCI

Our solutions empower investors to make better investment decisions by quantifying the factor exposures of a given portfolio, enabling them to better compete in the marketplace and position their products to win and retain business.

With over half a century’s experience in risk management and decades of supporting investors to implement and manage factor investing strategies, MSCI provides the solutions to build, measure and report portfolio exposure through the lens of factors.