Factors and Factor Exposures
Asset owners and asset managers are increasingly interested in so-called “smart beta” indexes, a category that includes factor and alternatively weighted indexes. In a series of four FTSE Russell Insights, we explore the concept of factors in depth. We examine the differences between factor indexes and other types of smart beta indexes, illustrate how factor exposure is embedded in an index and suggest how factors can be combined most effectively.
In this Insights, the first of the series, we start with definitions: what are factors and how is factor exposure measured?
The rise of interest in factors
Interest in factors is on the rise amongst investors. Consulting firm PWC1 recently forecast a tripling of the assets under management in index-based investment strategies worldwide between 2012 and 2020, and suggested that factor investing would be a key part of this trend. According to PWC:
“The growth of passive strategies will…be fuelled by new innovations in this space, such as factor investing…factor investing will ‘cross over’ from the realm of active managers, through highly sophisticated institutional passive investors, and into the mass-market retail space”.
Forecast Global AUM by Strategy Type (U.S.$ trillion)
PWC’s forecast was reinforced by a recent survey of asset owners, conducted by FTSE Russell. Just under half (47%) of the 214 respondents to the 2015 FTSE Russell Smart Beta Global Survey,2 with collective assets under management of over U.S.$2 trillion, said they were now evaluating combinations of factor strategies as part of their future asset allocation plans.
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