Factor Investing in 2025: Value, Momentum, Quality, Low-Volatility
A practitioner’s view of where the canonical equity factors stand after a decade of crowding, drawdown and renewal — and how to construct factor exposure that survives.
Factor investing is older than most of its critics realise. The intuition behind value goes back at least to Graham and Dodd in 1934; momentum was documented by Jegadeesh and Titman in 1993; quality and low-volatility have respectable lineages of their own. Yet the factor zoo and the post-2018 “value winter” have made even thoughtful allocators wary. They should not be.
What we actually mean by a factor
A factor is a systematic source of return that (a) has a coherent economic or behavioural explanation, (b) has been documented out of sample across markets and time, and (c) can be implemented with reasonable turnover and capacity. The canonical four — value, momentum, quality, low-volatility — all clear this bar. Most of the “factor zoo” does not.
Value: misunderstood, not broken
The post-2018 underperformance of generic price-to-book value reflected the obsolescence of an accounting measure designed for an industrial economy, not the death of the factor. Modern value implementations adjust for intangibles, share buybacks, and growth options. On those definitions, the factor has behaved much more closely to its long-run norms.
Momentum: real, but expensive in tail risk
Momentum has the largest Sharpe of the canonical four — and the worst tail. Crash risk in momentum is concentrated in regime turns; managing it via dynamic risk scaling, sector neutralisation and exposure to defensive factors materially improves the experience.
Combining the four
A multi-factor portfolio is not just an average of four single-factor portfolios. Sequential factor construction — selecting stocks that score well on multiple dimensions simultaneously — tends to deliver better risk-adjusted results than top-down weighted blending. Implementation matters as much as model.
FAQ
Are factors arbitraged away?
Some niche anomalies, yes. The canonical factors have survived four decades of academic and practitioner attention, suggesting their drivers are structural rather than purely informational.
How much factor exposure should a portfolio have?
It depends on tracking-error tolerance. A satellite allocation of 10–30% to a multi-factor sleeve is common among institutional allocators we speak with.
August Quants Research
The August Quants research desk publishes educational essays on systematic investing, market structure, ML in finance and portfolio construction. We write for institutional readers who value rigour over noise.
