Before the discovery of factor premia, the common model used to explain portfolio returns was the Capital Asset Pricing Model (CAPM) developed in the 1960s. This states that there is only one factor that systematically explains equity returns, namely market risk (beta). In the following decades, research in financial economics identified other factors that influence  equity returns. Today, there is a scientific consensus on the existence of a number of factors that affect equity performances. For example: it has been shown that expected returns are higher for  low-valued stocks (value)  over time, or that there is a systematic excess return for stocks with high price momentum. Factor-based investing refers to an investment strategy that considers  quantifiable company characteristics (factors).

We understand factor-based investing to bethe scoring of an equity relative to other equities based on unambiguously quantifiable criteria which allow an evaluation in terms of return potential.

The starting point is a systematic process based on the factors Value (valuation of the company), Momentum (positive price trend), Quality (solid balance sheet structure), and Growth (analyst expectations).

By combining  these factors (multifactor investing), companies are classified into five categories (-2 to +2),  ensuring an objective valuation  within the investment universe.

A classification in a positive category generally leads to a positive assessment of the return potential and thus leads to an above-average return expectation.