As I write this blog, it’s mid October, and the Major League Baseball playoffs are in full swing. Perhaps more than any other sport, baseball is famous for statistical analysis, and there are seemingly endless ways to evaluate every player. Similarly, there are many ways to evaluate stocks, and different portfolio managers assemble their “teams” using a variety of methods. To understand the differences, consider the ways that coaches can choose players for a baseball team.
- Factor strategies
Factors are measurable characteristics that can affect performance. In baseball, this can include stats such as stolen bases, batting average and on-base percentage. In equity investing, factors include value, size, momentum, low volatility, quality and dividend yield.
All athletes have intrinsic talents that are reflected in their stats. Similarly, equity investors already have exposure to factors that are inherent in stocks. Factor-based strategies, which can be index-based or actively managed, incorporate this knowledge into the selection process:
- Single-factor. Pitching coaches try to recruit the best hurlers for their bullpen, and may concentrate on a single statistic, like strikeouts. Similarly, a single-factor strategy will screen securities for just one factor.
- Multi-factor. The head coach could evaluate players based on several factors and build their team based on all of them. This is similar to the way that multi-factor strategies are built, giving diversified exposure to multiple investment factors within a portfolio.
- Fundamental active strategies
In addition to analyzing each player’s statistics, a coach could also conduct player interviews and assess which players seem to have the best attitude and the most “team chemistry.” Those non-statistical measures could influence their decision, as they search for the potential stars that others have overlooked. In the same way, fundamental active managers, in general, can consider both qualitative and quantitative information when building portfolios.
- Traditional market-cap-weighted strategies
Finally, a coach could accept every player who passes a basic physical. This is like a traditional market-cap-weighted passive strategy that simply provides exposure to the broad market.
What now? Three key takeaways
Fortunately, you don’t have to pick just one option when building a portfolio. Like different baseball players, each option has strengths and weaknesses. You can include fundamental active, market-cap-weighted and factor-based strategies, based on your investment objectives.
- Use Invesco’s interactive tool to see how adding a factor strategy to a traditional benchmark (the S&P 500 Index) can affect risk and return.
- See Invesco’s list of factor-based exchange-traded funds.
- Financial professionals: Contact Invesco Global Solutions for a Custom Portfolio Analysis, to see your factor exposures and much more.
Blog header image: David Lee/Shutterstock.com
Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes.
An investment in exchange-traded funds (ETFs) may trade at a discount to net asset value, fail to develop an active trading market, halt trading on the listing exchange, fail to track the referenced index, or hold troubled securities. ETFs may involve duplication of management fees and certain other expenses. Certain of the ETFs the fund invests in are leveraged, which can magnify any losses on those investments.
Christopher Hamilton, CFA®, CAIA
Head of Portfolio Advisory
Invesco Global Investment Solutions
Christopher Hamilton is Head of Portfolio Advisory for Invesco Global Investment Solutions. In this role, Mr. Hamilton leads Advisory Solutions efforts in the wealth management intermediary marketplace, with a focus on providing multi-asset portfolio construction research and guidance to financial advisors and wealth management platforms. As part of the Invesco Global Solutions franchise, he works to deliver in-depth portfolio research, analytics tools and investment solutions to investors across North America.
Prior to assuming his current position, he was part of the Wealth Management Intermediary strategy team, focused on developing multi-faceted distribution strategies for key clients across multiple channels. Prior to joining Invesco, Mr. Hamilton was a portfolio manager for U.S. Trust, focused on building out asset allocation and portfolio construction frameworks, and leading manager selection efforts for high-net worth individuals and institutions. He was also director of business analysis for Phillips 66, where he engaged in merger, acquisition and divestiture efforts, as well as capital market activities for the organization.
Mr. Hamilton earned a BA degree in economics from the University of Illinois at Urbana-Champaign, and an MBA from Rice University. He holds the Series 7, 63 and 66 registrations. He also holds the Chartered Financial Analyst® (CFA) designation, the Chartered Alternative Investment Analyst (CAIA) designation, and is a member of the CFA Society of Houston.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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