Factor investing is projected to grow to $3.4 trillion by 2022, up from $1.9 trillion as of Sept. 30, 2017, according to BlackRock. While enthusiasm for factor-based investing continues to grow, so too does a risk: piling on individual factor exposures to achieve an expensive form of beta.
Call it the combo-platter conundrum. The early days of factor-based investing were marked by traditional a la carte selection of individual factors such as size, value, momentum, quality and low volatility. Now it's increasingly common to see combination approaches that purport to provide exposure to several factors in a single product, often under the generic moniker "multifactor."
While we strongly support a multifactor approach, we have serious reservations about the ability of some so-called multifactor products to deliver on their promise of multifactor exposure. Some providers appear to have simply cobbled together existing single-factor products in various combinations to create new suites of multifactor strategies. We believe many of these hastily developed products suffer from the effects of dilution, or the unintentional offsetting of individual factor exposures. Dilution attenuates the total factor content of the multifactor strategy, often resulting in multifactor products with little or no net factor exposure. Investors essentially end up investing in an index, at a higher cost.