What is Factor Management?   Factor management is a scientific, regulated approach to investment. The method was developed in the 1990s, but it is especially after the financial crisis in 2008 that many investors and researchers have caught the eye of the great benefits that factor management provides compared to more traditional management methods. Norges Bank, the manager of the “oil fund” (Statens Pensjonskasse Utland), made a groundbreaking study in 2009 which showed that most of their return on investment could be explained by factors. The pioneer in the field, Professor Eugene F. Fama, was awarded the Nobel Prize in 2013 for his work on factor models.   (Photo) Professor Eugene F. Fama Nobelprisvinner 2013 Foto. Bengt Nyman – Creative Commons In short, the factor management is to identify factors, or characteristics, of stocks that in the long run do better than the rest of the market. These factors can then be used to put together portfolios of stocks that over time are most likely to outperform the market. In addition to increasing the return, factors can also be used to analyze what drives the return on other portfolios or funds.   A central theme of the research is why these factors produce excess returns. Traditionally, only risk was used as an explanation, but investors’ behavior is now also considered as an important explanation for why these factors continue to yield excess returns.   Continuous debate about factors, and the large amount of research in the field, has led to a real problem called factor ZOO, an expression of describing the increasing amount of factors. Therefore, there is every reason to be skeptical of new and unknown factors, but there is a broad consensus on the 5-6 most important and most stable factors that research in different markets and time periods has confirmed. These factors have been shown to explain more than> 95% of the return on diversified equity portfolios (see also articles on our blog about these factors).
The market factor: By investing in a broad portfolio of shares, we will bring the risk premium associated with the stock market.  

Momentum: stocks that have done best in the last 3 to 12 months continue to do best in the months ahead.  

Value: cheap stocks, measured on fundamental values such as book values, earnings, cash flow, etc., do better over time.  

Size: Shares in smaller companies outperform stocks in larger companies.    

Low risk: “boring” stocks that swing less, outperform exciting stocks.  

Quality: high quality stocks, measured by specific accounting figures such as Gross return on capital, outperforms shares that score lower on quality. Variants of these factors also work on other asset classes such as commodities, currencies and fixed income securities.   New studies are being published on optimal measurement and implementation of factors in portfolios. Lately, there has also been exciting new research on the timing of factors and the use of new techniques in machine learning and the use of alternative data to further improve factor management.

“The key factor is, in short, to identify factors, or characteristics, of stocks that in the long run do better than the rest of the market.”