TITLE: FUNDAMENTALS OF EFFICIENT FACTOR INVESTING
Authors: R. CLARKE, H. DE SILVA, and S. THORLEY
Publication: FINANCIAL ANALYST JOURNAL • VOL. 62 • DECEMBER 2016
#Research Question: Is a long only constrained-investor, with views about equity market factor returns, better off with a combination of factor portfolios or with a portfolio of individual securities exposed to the desired factors?
#Academic Insight: Portfolios built directly from individual securities capture most of the potential gain (80%) from exploiting a small set of factors whereas combinations of specialized factor portfolios capture only a fraction (40%) of that potential.
#Application: Investors who have the resources and capabilities are better off gaining exposure to factors, within the equity asset class, directly from individual securities rather than from pre-packaged multi-factor solutions. One caveat: if a pre-packaged portfolio measures all the factors that the end investor views as relevant or desirable, it would serve as an appropriate substitute.