Factor investing: the third pillar of investing alongside active and passive

The rise of factor strategies in the investment landscape aids understanding and better decision making for investors

Jul 17, 2018 | Stephen Quance

As factor strategies increasingly become mainstream, investors face more choices than ever. Adding to the confusion is terminology that is commonly misused when trying to distinguish between strategies.

We propose an inclusive framework to help comprehend terms like active, passive and factor investing in a way that aids decision making. Factor investing is emerging as a third pillar of investing alongside traditional alpha strategies and market cap-weighted indexing. By focusing on the components of portfolio returns that can be controlled, we can distinguish between the three investment options with clarity and purpose.

The point is not to dictate which one is best, but instead to aid in understanding of how they differ so that investors can make more informed decisions.


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