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How Factor Investing Works, Using Everyday Examples



Factor Investing

Factor Investing: How You May Experience it

Why do investments perform the way they do? This is a question many investment experts have been attempting to answer for years. Luckily, factor investing can provide investors with a data-driven understanding.

In this infographic from MSCI, we use scenarios from everyday life to explain how factor investing works.

What is Factor Investing?

Simply put, investors choose stocks based on the “factors”, or characteristics, that help explain investment performance. They are typically aiming for:

  • Higher returns
  • Lower risk
  • More diversification

While you may not have actively incorporated factor investing in your current portfolio, almost everyone will be familiar with the underlying concepts in real life. Here are five common factors and scenarios where you likely experience their principles.

1. Low Volatility Factor

The low volatility factor attempts to capture excess returns to stocks with lower than average risk. This factor has generally performed best during economic slowdowns or contractions.

How you may experience it: If you want a writing career with relatively reliable income, you’ll likely choose to be a marketer at a large company rather than a self-employed author.

2. Quality Factor

The quality factor attempts to capture excess returns in shares of companies that are characterized by low debt, stable earnings growth, and other “quality” metrics. This factor has generally performed best during economic contractions.

How you may experience it: When you’re purchasing new tires for your car, you might consider characteristics like tread longevity, traction, and fuel economy.

3. Value Factor

The value factor attempts to capture excess returns to stocks that have low prices relative to their fundamental value. This factor has generally performed best during economic recoveries.

How you may experience it: If you want a good deal, you may look for items that are on sale.

4. Momentum Factor

The momentum factor attempts to capture excess returns to stocks with stronger past performance. It has generally performed best during economic expansions.

How you may experience it: When you’re deciding what to watch, you may choose a TV show that has high audience ratings. You’ll likely also recommend it to your friends, which further boosts viewer numbers.

5. Low Size Factor

The low size factor attempts to capture excess returns of smaller firms (by market capitalization) relative to their larger counterparts. It has generally performed best during economic recoveries.

How you may experience it: When you’re learning a new sport, you’ll see larger increases in your skill level than a professional athlete will.

Understanding Your Investments With Factor Investing

These simple concepts are at work in your everyday life and in your investments. Targeting these factors can help you meet your investing goals, including maximizing return potential and managing risk.

From 2000 to 2020, here’s how the risk and return of the above factors compared to the benchmark MSCI World Index.

Low Size8.0%17.0%
Low Volatility7.6%11.1%
MSCI World Index6.6%15.6%

​​Annualized risk and gross returns in USD from December 29 2000 to December 31 2020 for MSCI World Factor Indexes.

All five of the factors have had greater historical returns than the benchmark index, and some have also had lower risk.

With factor investing, you can better understand what drives your portfolio’s performance.

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Visualizing Japan’s Top 25 Companies by Market Cap

Japan’s top 25 corporations are worth a combined $2 trillion.



Graphic showing Japan’s 25 largest corporations.

Japan’s Top 25 Companies by Market Cap

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

Japan’s top companies are worth a combined $2 trillion.

In this graphic, we use data from CompaniesMarketCap to list the country’s largest corporations, as measured by market capitalization as of Feb. 2, 2024.

Automaker and Electronics Company Lead

Japan is the third largest economy in the world after the United States and China, and also one of the top producers of manufactured goods globally.

The country’s largest company, automaker Toyota, has a market cap of over $273 billion. The company is the largest automobile manufacturer globally, producing about 10 million vehicles per year. It is also the 20th biggest company in the world.

In addition, the automaker is considered the most valuable brand in Japan, worth $53 billion.

RankNameSectorMarket Cap (USD)
1ToyotaConsumer Discretionary273,143,000,000
2SonyConsumer Discretionary121,276,000,000
3Mitsubishi UFJ FinancialFinancials112,989,000,000
5Nippon Telegraph & TelephoneCommunication Services106,295,000,000
6Tokyo ElectronTechnology87,707,456,525
7Fast RetailingConsumer Discretionary80,279,788,422
8Shin-Etsu ChemicalIndustrial79,917,463,493
10Mitsubishi CorporationConglomerate71,239,298,556
11KDDICommunication Services69,347,949,137
12Sumitomo Mitsui Financial GroupFinancials68,730,634,240
13NintendoCommunication Services66,761,374,986
14Itochu ShojiIndustrial65,654,901,787
17Oriental LandConsumer Discretionary59,854,280,904
18Mitsui BussanIndustrial59,414,309,869
19Daiichi SankyoHealth Care58,176,818,863
20Chugai PharmaceuticalHealth Care57,498,589,104
21HondaConsumer Discretionary54,203,588,608
22Tokio MarineFinancials50,610,597,498
23Mizuho Financial GroupFinancials47,274,393,600
25Japan TobaccoConsumer Discretionary46,744,684,688

In second place, Sony Group produces a variety of consumer electronics and entertainment products, including televisions, audio equipment, cameras, smartphones, and video games. The company also includes brands such as Sony Pictures and Sony Music, as well as a financial arm.

The list also includes Mitsubishi UFJ Financial (MUFJ), Japan’s largest financial group with nearly $3 trillion in assets, and Recruit, an HR company that owns the job search engine Indeed, as well as the employer review site Glassdoor.

Nintendo, a well-known brand outside of Japan, ranks 13th among the biggest Japanese companies.

At the bottom, Japan Tobacco is the company responsible for selling two well-known American brands, American Spirit and Camel, outside of the United States.

Most of the largest companies in Japan are in the consumer discretionary sector (24%), followed by financial firms (20%) and industrial groups (16%).

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