Koenig: Factors Versus Styles
The early 1980s was a time of tremendous innovation as technological advances spurred new products and thinking across industries from computing to music to autos to investing. 1981 brought us innovations such as IBM's first PC, the MTV video music network, the DeLorean sports car and the first institutional index fund.
A few years later, Russell Investments introduced the Russell 2000 Index, the first small-cap benchmark, followed by the first growth and value style indexes. Together, these indexes formed the basis for the now-well-known style box, and have helped shaped the way investors construct portfolios for many years.
Since that time, indexing has grown dramatically and is now seeing another era of innovation, with the introduction of a wide variety of factor indexes focused on individual factors such as low volatility, quality, momentum and value.
Factor investing has quickly graduated from playing open-mic night at small nightclubs to headlining the largest arenas. And investors are working to understand these strategies—how factors are similar to or different from traditional styles and how these strategies can be incorporated into their portfolios.
Some industry practitioners have asserted that factor investing might replace traditional styles and the style box. Others have dismissed factor investing altogether as a series of one-hit wonders, potentially positioning investors for disappointment down the road.
So, what's the right answer? Will factor investing prove to be as influential and lasting as indexing itself, or as short-lived as the DeLorean? As with any new concept, the answer is more nuanced than a simple thumbs-up or thumbs-down.
Factor indexes represent new tools that investors can use to construct more precise portfolios based on their unique objectives and tolerance for risk. For many, a combination of traditional styles and new factor strategies may provide the best solution for their investment needs.
Distinguishing Factors From Styles
|Active vs. Passive||
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