After several years of being feted, factor investing is coming under scrutiny. A body of evidence exists to suggest it is not nearly as effective as you’d think.
Our article finds that researchers often make “absurd assumptions” in their theories to support a factor-based return, such as putting transaction costs at zero.
It is said that the live return for a factor index could be substantially lower than the published return. Indices can take weeks to update, during which time active managers have had ample time to build up positions. Also, some constituents of factor indices have a low market capitalisation, which means they are difficult or expensive to trade.
Our article also hears investors may not be getting the diversification they think they are through multi-factor investing and that ultimately, the question of which factor to choose may not be that different to picking which manager will do well in the next five years.
Nick Fitzpatrick is group editor at Funds Europe
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