Factor Investing

In 1970, Eugene Fama published "Efficient Capital Markets" in the Journal of Finance, synthesising decades of research into a single coherent framework. The core idea is deceptively simple: in a competitive market with many well-resourced participants, prices rapidly incorporate all available…

If markets are even semi-strong efficient, then analysing publicly available information to find mispriced securities is — in aggregate — a zero-sum game before costs and a negative-sum game after them. This does not mean every active manager underperforms every year. It means that the burden of…

The Capital Asset Pricing Model (CAPM), developed in the 1960s, proposed that a single factor — beta, or sensitivity to the overall market — explained why some stocks delivered higher returns than others. Higher beta meant higher expected return, and that was largely the story.

In 1993, Narasimhan Jegadeesh and Sheridan Titman published "Returns to Buying Winners and Selling Losers" in the Journal of Finance, documenting one of the most robust anomalies in financial economics: stocks that have outperformed over the past three to twelve months tend to keep outperforming…

Traditional index funds weight each stock by its market capitalisation: the bigger the company, the larger the portfolio position. Factor investing — sometimes marketed as "smart beta" — breaks this link. Instead of weighting by size, factor ETFs tilt portfolios toward stocks exhibiting…

Most arguments about investing involve uncertain empirical claims — past performance, future market conditions, the skill of a particular manager. William Sharpe's 1991 paper "The Arithmetic of Active Management," published in the Financial Analysts Journal, was different. It made the case for…

Since 2002, S&P Dow Jones Indices has published the SPIVA Scorecard — S&P Indices Versus Active — tracking the performance of actively managed funds against their passive benchmarks. Updated semi-annually and covering multiple geographies and asset classes, SPIVA is the most comprehensive ongoing…

The case for passive investing is strongest where markets are most efficient. But efficiency is not a binary property — it varies across markets, asset classes, and time periods. Understanding where passive makes the most sense requires understanding what drives market efficiency in the first place.

Before allocating capital to an active fund, investors invariably look at its track record. This behaviour is almost universal — retail investors, financial advisers, and sophisticated institutions all give significant weight to past returns. The implicit assumption is that a manager who has…

The near-universal finding that past performance does not predict future performance applies most clearly to publicly traded markets — equities, bonds, and similar instruments. Private equity (PE) is the significant and well-documented exception. Kaplan and Schoar's 2005 paper "Private Equity…