EXECUTIVE SUMMARY
As factor-based investing gains momentum, many market participants are increasingly moving beyond single factors and are constructing multi-factor portfolios. This progression is not surprising given that combining factors that have low or negative correlation can potentially result in a more diversified portfolio.
However, one should note that different factors have varying performance patterns depending on market conditions, economic cycles, or investor sentiment.[1] While every factor strategy aims to earn higher risk-adjusted returns than the broad market over a long-term investment horizon, factors can go through long periods of underperformance.
Therefore, factor-based investing involves the potential for relative underperformance. At the same time, timing factors dynamically is difficult to implement and can be costly.[1] Therefore, the appeal of a multi-factor strategy lies in its ability to provide potentially smoother risk/return patterns than single-factor strategies, while addressing the issue of choosing between factors.
In light of this rationale, S&P Dow Jones Indices (S&P DJI) launched the S&P/BMV Quality, Value & Growth Index in August 2017. The index is designed to measure the performance of securities in the S&P/BMV IPC that exhibit high quality, value, and growth characteristics. In this paper, we introduce the performance of those factors, our rationale for combining them, the index construction, and the methodology behind the index.
Before diving deeper into the multi-factor strategy, it is important to understand the evolution of the implementation of factor strategies in passive investing. Factor strategies such as value, quality, and growth have existed for decades and have been utilized by active management as part of the security selection and the investment processes. Passive offerings of factor strategies began with the introduction of growth and value investment styles and later extended to factors such as quality, momentum, and low volatility.
