TL;DR
Factor investing generally outperforms active management in the long run, as 80-90% of actively managed funds underperform their benchmark. It offers a systematic and repeatable approach that minimizes emotional decision-making and high management fees.
8 min readTraditional active management relies on fund managers' experience and intuition for stock selection. Factor investing is a rules-based, systematic, and repeatable approach. Both have strengths and weaknesses.
Active Management Performance
Global data shows 80-90% of actively managed equity funds underperform their benchmark over 10+ years. On BIST, most TEFAS funds also fail to beat the BIST 100. High management fees and emotional decision-making hurt performance.
Advantages of Factor Investing
Systematic approach: no emotional decisions. Transparent rules: you know what you own. Low cost: implementable without active management fees. Repeatability: same rules produce consistent results. Academic foundation: 30+ years of research support.
Limitations of Factor Investing
Factors are cyclical — every factor can underperform for extended periods. Model risk exists — wrong factor definition produces wrong results. Discipline required — staying committed during bad periods is psychologically challenging.
The Best Approach
Combining strengths of both is most effective: use systematic factor portfolio as the core, add active views as satellite. This core-satellite approach maintains discipline while providing flexibility. Test your own strategy with Borsafolio's portfolio simulator.
Track factor portfolio performance live.
Go to Portfolios →Related articles: What Is Factor Investing?, Momentum Factor, Value Factor, Low Volatility.
Frequently Asked Questions
What is factor investing?
Factor investing is an investment strategy that systematically selects stocks based on specific criteria (factors). This approach offers a rules-based selection process, minimizing emotional decision-making.
What is active management?
Active management is an investment strategy where fund managers make stock selections based on their experience and intuition. This method is associated with high management fees and emotional decision-making.
What are the advantages of factor investing?
The advantages of factor investing include a systematic approach, transparent rules, low costs, and repeatability. This allows investors to achieve more consistent results.
What are the limitations of factor investing?
The limitations of factor investing include cyclical factors, model risk, and the need for discipline. Especially during poor performance periods, it can be challenging to stick to the strategy.
What is the core-satellite approach?
The core-satellite approach is an investment strategy that uses a systematic factor portfolio as the core while adding active views as satellites. This method provides flexibility while maintaining discipline.
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.
