Factor Investing: From Theory to Practice

The topic of factor investing has been hard to ignore in the last few years. Many new products (often termed smart beta) have been launched, seemingly offering a “silver bullet” for investors, claiming sustainable excess returns with high levels of transparency and very low fees.

Mercer has been advising on factor exposures in equity portfolios for well over a decade, including recommending a dedicated low volatility exposure since 2010 and a five factor framework for building robust equity portfolios since 2014.

Factor strategies vary hugely and should be considered a form of active management, even when offered in index format. Some factor strategies can play a useful role in building robust equity structures, bringing cost and transparency benefits. However, as with all active approaches, investors need to ensure that they have a full understanding of each strategy’s characteristics, pitfalls and expectations before investing.

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