Think of factors as different dimensions of risk to analyze your portfolio. In the same way that it is very hard to fly a plane without instruments giving you altitude, pitch, and roll it is also very hard to understand the effects various risks and shifts in market sentiment will have on your portfolio if sensitivity to risks are not viewed through multiple lenses, or factors. The earliest quant could be considered the Father of Value Investing and author of The Intelligent Investor Benjamin Graham. The next major stride in the discipline occurred when Harry Markowitz published his revolutionary paper Portfolio Selection in 1952.

Factor premia refers to the premium of one factor versus a benchmark, like the S&P 500. For example, you may hear a lot about continuous shifts between growth and value. Value stocks are those that have a price near or below some measurement of intrinsic value or may enjoy a deep discount compared to peers. Growth stocks usually have significantly higher rates of revenue and earnings growth relative to the benchmark, many benefitting from exponential increases in business from network effects. However, many investors may interpret these two categories by certain sectors. For example, many folks might think of Energy as a value sector and technology as a growth sector. Growth At a Reasonable Price (GARP) is sometimes used to describe stocks containing characteristics of both classes. However, this is a shortcut and can be incorrect. In the words of legendary value investor Bill Miller “any stock trading below intrinsic value can be a value stock.” Similarly, as our head of research Tom Lee has pointed out cyclical is the new growth. In our extraordinary times, pent-up demand and pricing power, earnings and revenue growth at old-guard companies has been much higher than the rest of the market at times. The different factors we will analyze help us look at the market strictly through systematically defined risk dimensions to assist us in leaving our pre-disposed notions about asset classes behind.

We described the difference between value and growth and how preconceived notions can affect how investors group stocks into those categories. We want to give you an example of one stock for each factor category so you can look into the characteristics that place it there. Marathon Oil ($MRO) is a great example of a stock that currently scores high across value factors. Of course, MRO’s scores (like any stock) can change with time.