Demystifying smart beta: Creating a common language for factor investing

Investors need a clear and consistent way to talk about factors. For more than 40 years, MSCI has defined how investors use factors to analyse risk and return, from individual stocks to entire portfolios. Factors are important drivers of portfolio performance and are well documented in academic research. They are used to quantify how much risk and return is attributable to different countries, sectors and styles.

With the recent growth in factor in- vesting (also known as “smart beta”), investors increasingly are using “style factors,” such as value, quality and momentum, to understand performance and create investment strategies. But there are a host of style factors used in the investment world, with varying definitions. This lack of consistent definitions has created demand for a common language and standards to describe these powerful influences on security and portfolio performance.

In response, we have introduced a new standard, MSCI FaCS, for analysing and reporting style factors in equity portfolios. In addition, we have created the MSCI Factor Box, an interactive tool using MSCI FaCS data to view factor exposures in funds compared to selected benchmarks.

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