Diversification Adds Value

Steve Tuttle highlights the performance of factor investing, and shows why diversification is so important now.   

Diversification Benefits to Factor Investing

Instead of trying to “chase” performance by investing in what has performed well recently, seek multiple sources of return through a diversified portfolio.

History shows that investment asset classes, styles, sectors, and factors move in and out of favor over time.  The table below tracks the annual returns of well-known investment factors.  Each factor focuses on specific investment characteristics widely accepted as important exposure in a portfolio. 

Single factor performance tends to be cyclical.  No single factor works all the time.  Note how factors move up and down year-to-year on the table. 

The good news is that most factor returns generally are not highly correlated with one another.  This indicates that investors may benefit from diversification by blending multiple factor exposures in a portfolio.  The Multi-Factor box below seeks exposure to four common factors:  value, momentum, quality, and size.    

In the last 15 years, the world endured multiple natural disasters, numerous geopolitical conflicts, and the deepest recession in the post-WWII era.  Through it all, a portfolio that blends multiple factors produced solid returns with moderate risk, relative to single factors.  

We believe diversification can help manage risk, while also maintaining exposure to market growth.

Annual Returns (in Percentages) of Factors

Source: FactSet, MSCI, Russell, Standard & Poor’s, J.P. Morgan Asset Management. The MSCI High Dividend Yield Index aims to offer a higher than average dividend yield relative to the parent index that passes dividend sustainability and persistence screens. The MSCI Minimum Volatility Index optimizes the MSCI USA Index using an estimated security co-variance matrix to produce low absolute volatility for a given set of constraints. The MSCI Defensive Sectors Index includes: Consumer Staples, Energy, Health Care and Utilities. The MSCI Cyclical Sectors Index contains: Consumer Discretionary, Communication Services, Financials, Industrials, Information Technology and Materials. Securities in the MSCI Momentum Index are selected based on a momentum value of 12-month and 6-month price performance. Constituents of the MSCI Sector Neutral Quality Index are selected based on stronger quality characteristics to their peers within the same GICS sector by using three main variables: high return-on-equity, low leverage and low earnings variability. Constituents of the MSCI Enhanced Value Index are based on three variables: price-to-book value, price-to-forward earnings and enterprise value-to-cash flow from operations. The Russell 2000 is used for small cap. The MSCI USA Diversified Multiple Factor Index aims to maximize exposure to four factors – Value, Momentum, Quality and Size. Annualized volatility is calculated as the standard deviation of quarterly returns multiplied by the square root of 4. Guide to the Markets U.S. Data are as of April 30, 2020.



Past performance may not be indicative of future results. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that their future performance will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. The statements made in this newsletter are, to the best of our ability and knowledge, accurate as of the date they were originally made. But due to various factors, including changing market conditions and/or applicable laws, the content may in the future no longer be reflective of current opinions or positions. Any forward-looking statements, information and opinions including descriptions of anticipated market changes and expectations of future activity contained in this newsletter are based upon reasonable estimates and assumptions. However, they are inherently uncertain and actual events or results may differ materially from those reflected in the newsletter. Nothing in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. Please remember to contact Signet Financial Management, LLC, if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and/or services. No portion of the newsletter content should be construed as legal, tax, or accounting advice. A copy of Signet Financial Management, LLC’s current written disclosure statements discussing our advisory services, fees, investment advisory personnel and operations are available upon request.

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