Factor Investing: A Way to Seek Better-Than-Index Returns

Community Manager
Community Manager

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Lance Humphrey, CFA, Portfolio Manager of Global Multi-Assets.jpgBy Lance Humphrey, CFA, Portfolio Manager of Global Multi-Assets


At USAA, we believe that markets are often inefficient, and skilled active management can provide returns above broad-based market benchmarks over time. We use a variety of techniques to achieve our long-term objectives. One of these techniques is factor based investing.


Factor investing is a process used to identify stock characteristics associated with attractive, long-term returns and then use them to guide our investing. It’s similar to what some baseball teams have done, as you may have seen in the movie “Moneyball.” The Oakland Athletics determined that a player’s on-base percentage and slugging percentage were better indicators than traditional measures such as height, contact and speed. You can think of on-base percentage as a “factor” for predicting baseball players’ success. Other factors you may know are a student’s grade-point average (GPA) and SAT score. Colleges rely on these types of statistical factors to predict the success of a student’s academic career.


Before adopting a factor for stock selection, we look for a long-term, proven track record. We don’t want to invest on the basis of a short-term phenomenon that disappeared after a few years. Also, as managers of global asset allocation funds, we seek factors that work around the world, in addition to the U.S. We’re also interested in factors that work across multiple asset classes and securities. When we find factors that work over long periods and across regions and asset classes, we gain a level of confidence that these relationships will persist. Of course, there will be periods when factors don’t work. But we’re focused on the long term.


There is a handful of factors that have passed all of these tests. Some of the most common factors are value, momentum, size, quality and volatility. These are all characteristics that can be measured using publicly available data.


We particularly like value and momentum. The evidence, including historical analysis over more than a century, is greatest for these factors.




Value means buying or overweighting “cheap” stocks and selling or underweighting “expensive” stocks. One way to measure value is by looking at a company’s price to book value. In other words, how expensive is the stock relative to the value of the assets on its books? These types of measures help to identify stocks that may be priced below their fundamental value.


Momentum means buying stocks that have recently done well and selling stocks that have recently lagged. Stocks that have performed well over the most recent intermediate-term period tend to continue to outperform. The reverse is true, too.


Value and momentum have another intriguing characteristic: they tend to be negatively correlated. In other words, when one underperforms, the other may outperform. Over long periods of time, this tends to smooth out a portfolio’s average returns.


We believe using value and momentum can help to generate returns that are attractive relative to the index, and relative to the amount of risk we take. We use a systematic, disciplined strategy to identify value and momentum stocks, and then build a portfolio that harvests these characteristics while diversifying across a broad number of stocks. The diversification process helps control the overall risk of the portfolio.




As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are suited for you based upon your individual goals, objectives, risk tolerance and time horizon.


Investing in securities products involves risk, including possible loss of principal.


This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.


Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.


Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.


Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment advisor and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.



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