TL;DR
To create a multi-factor portfolio, a combination of factors such as momentum, value, and low volatility is used. This process helps investors optimize their risk-return profile.
7 min readRelying on a single factor carries cyclical risk — momentum crashes during crises while value can lag for years. A multi-factor approach combines low-correlated factors to reduce this risk and create a more stable return profile.
Why Multiple Factors?
Fama-French research shows no single factor outperforms in every period. Between 2010-2020, the value factor underperformed globally while momentum was strong. Combining them protects the portfolio against both scenarios.
Factor Correlations
In BIST data, momentum and value factors show low, sometimes negative correlation. This means combining them provides genuine diversification benefit. Low volatility also shows low correlation with both — the triple combination is the most effective structure.
Combination Methods
Two main approaches exist: (1) Blending — equal-weight allocation from each factor portfolio; simple and transparent. (2) Integration — compute a combined factor score per stock and select top scorers; more efficient but complex. Borsafolio's ML Ensemble portfolio uses the integrated approach.
Recommended Combination for BIST
Based on backtest results, the most effective triple combination on BIST is: Momentum (return engine) + Low Volatility (risk shield) + Value (valuation discipline). This combination has delivered lower maximum drawdown and higher Sharpe ratio compared to single-factor portfolios.
Test your own multi-factor portfolio in the simulator.
Go to Simulator →Related articles: What Is Factor Investing?, Momentum Factor, Value Factor, Low Volatility.
Frequently Asked Questions
What is a multi-factor portfolio?
A multi-factor portfolio is an investment strategy that combines different investment factors (such as value, growth, momentum, etc.). These portfolios aim to provide a more balanced performance across various market conditions.
How are factors selected?
Factors are chosen based on the investor's strategy. For example, an investor focusing on growth stocks may prefer companies with high growth potential (like THYAO).
What are the weighting methods?
Weighting is determined according to the investor's risk tolerance. For instance, an investor following a growth-oriented strategy may allocate more weight to stocks like THYAO and EREGL.
How is the data collection phase conducted?
In the data collection phase, investors gather information related to stocks, such as prices and trading volumes. For example, accessing five years of data is important for understanding the historical performance of stocks.
What is the analysis and modeling process?
The analysis and modeling process involves evaluating the collected data and analyzing the potential returns of various factors. This phase helps investors make informed decisions.
This content does not constitute investment advice. Past performance is not a guarantee of future results. Make your investment decisions based on your own risk profile.
