May 7th, 2019 | Barron's
Factor Investing Raises Questions; Gregg Fisher’s Answers in Barron’s
Factor investing—an approach that Gerstein Fisher helped pioneer a quarter-century ago—is a complicated affair. And it has become more so in recent years as it caught on and practitioners identified more and more factors: security and company characteristics historically associated with beating the market.
A May 3, 2019, Barron’s article, “How to Use ETFs for Factor Investing,” outlined several of the questions that come with the territory in factor investing, along with responses by Gregg Fisher, Gerstein Fisher Founder, Portfolio Manager, and Head of Research. For example, how concentrated should factor-based portfolios be? Some managers hold only a few dozen stocks, in the interest of maintaining a “pure” factor strategy. Gregg, however, argues for a much more diversified portfolio. “Our strategies,” he says, “have about 300 holdings in them.” With a broad set of holdings, stock-specific risk is limited (but not eliminated, which would be a counterproductive goal).
“The most difficult question,” says Barron’s, is figuring out how to allocate factors in a portfolio. What you don’t want to do, says Gregg, is try to time factors. To him, that’s as difficult (and ill-conceived) as timing the overall market.
Rather, he advocates a life-cycle approach based on an investor’s age and risk tolerance. Gregg’s research suggests shifting from an emphasis on more-volatile factors early in life (like the small-cap and value advantages) to more-stable factors later on (like company quality). As the Barron’s article reminds us, “a retiree’s time horizon is quite different from a recent grad’s.”
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