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Evolving From Single-Factor To Multifactor Investing

Mar. 08, 2018 10:20 AM ET
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S&P Dow Jones Indices

By Akash Jain

This article is the third in a series of blogs. The previous two were titled "Factor Investing 101" and "How Do Single Factors Perform in Different Market Regimes in India?" This blog discusses sectoral tilts of different single factors and varying correlations between factors in different market cycles.

In our report, sector bias typically existed in factor portfolios, and differentials on sector exposure across factor portfolios were strongly associated with the unique cyclical nature of factor performance. Exhibit 1 highlights the two most overweight and most underweight sectors, on average, for each factor over the period from March 2006 to March 2017. Value and dividend were overweight in basic materials, whereas momentum, quality, and size were overweight in consumer discretionary goods & services. The finance sector was most underrepresented in the momentum, quality, low volatility, and size portfolios, and the information technology sector was underweight in value, dividend, and size portfolios.

Exhibit 1: Sector Bias Versus the S&P BSE LargeMidCap


Most Overweight Sectors and Weight Differential (%) Versus Benchmark

Most Underweight Sectors and Weight Differential (%) Versus Benchmark


Basic Materials, 13.7

Information Technology, -10.9

Energy, 7.7

Fast Moving Consumer Goods, -8.1


Healthcare, 6.2

Finance, -6.0

Consumer Discretionary
Goods & Services, 5.4

Energy, -5.8


Fast Moving Consumer Goods, 9.6

Finance, -22.9

Consumer Discretionary
Goods & Services, 9.0

Utilities, -4.0

Low Volatility

Healthcare, 11.1

Finance, -16.9

Fast Moving Consumer Goods, 6.8

Industrials, -5.2


Basic Materials, 10.8

Information Technology, -7.0

Energy, 4.2

Healthcare, -4.7


Utilities, 4.4

Information Technology, -6.1

Consumer Discretionary
Goods & Services, 4.2

Finance, -5.2

Source: S&P Dow Jones Indices LLC. Data from March 2006 to March 2017. The S&P BSE Dividend Portfolio and S&P BSE Equal-Weighted Portfolio are hypothetical portfolios. Figures in the table are average figures for the semiannually rebalanced portfolios. Past performance is

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