The Factor Investor, aka The “Tilter”

Many investors in highly diversified index funds are still likely to believe that different rates of return should be expected from stocks than from bonds. This idea naturally leads investors and researchers to also consider when different rates of return should be expected from one stock versus another, or from one bond versus another, or between any two other assets. Numerous studies have shown that smaller and cheaper stocks have tended to deliver higher returns than larger and more expensive stocks, and longer-dated and lower-quality bonds have tended to outperform shorter-dated and higher-quality bonds over time. This chapter considers some of these different factors observed to correlate with higher rates of return, and how investors and funds might implement these ideas.