*This article is produced in partnership with iShares by BlackRock and MSCI.

Market events so far in 2024 have served as a reminder that the global economy may not be “out of the woods” yet when it comes to persistently high interest rates and uncertain growth. Recent CPI data out of Australia and the US has surprised on the upside, while the escalation of tensions between Israel and Iran has markets nervy about a potential future energy shock.

With macro risks abounding in today’s volatile environment, it’s important for investors to be “the pilot not the passenger” and take a selective approach to allocations. This is where factor investing can help, by enabling investors to focus on the long-term drivers of excess returns in equity markets, and providing additional diversification to help portfolios weather the storm of market volatility.

What is factor investing?

Factor investing is the strategy of identifying stocks within an investment universe that exhibit certain characteristics, or factors. These factors can help investors to drive stronger long-term returns, lower the overall level of risk in a portfolio, or tactically zero in on types of stocks that may outperform in different market conditions.

Factors like quality, momentum, value, minimum volatility and size have been a significant part of active managers’ investing toolkit for many years, having first been discovered by Columbia accounting professors Benjamin Graham and David Dodd in the 1930s. They are supported by decades of economic theory, including six Nobel prizes.

Factor strategies – A deeper dive

Investment managers may assess each of these factors in different ways, so it’s important to define our approach to factor investing.

In terms of quality, BlackRock looks at profitability, leverage and earnings stability to determine if a company meets the definition of a quality stock. When it comes to momentum, we measure upward price trends on both a six-month and twelve-month basis. For value, we look at financial ratios including price-to-book, forward price-to-earnings and enterprise value to cash flow from operations to assess if a company may be undervalued. And when evaluating minimum volatility, we look at both individual volatility and how stocks move relative to each other.