Factor investing
Building a portfolio around characteristics that historically explained differences in returns: valuation, size, quality, momentum, calmness of price.
How to read the number
It replaces the question of which company is better with the question of which property one wants exposure to, after which the portfolio is assembled by property rather than by name.
When the metric lies
Factors work in episodes: a stretch of underperformance is measured in years, and the decision to abandon a factor usually lands shortly before it returns. Part of the historical premia shrank once the research was published.
Also known as: smart beta