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Posted by Brett Gustafson on Sep 8th, 2023

Portfolios With a Purpose: Factoring It In

Whether it’s monitoring the macro environment, ensuring you are invested in the right products, achieving the desired asset allocation, or simply feeling compelled to trade because you haven’t in a while, designing and maintaining portfolios is never a simple task. The good news is that statistically, a client has not selected you to be their advisor for the products that you select. To further confirm that, if you manage a passive balanced portfolio, returns are not likely going to be a competitive advantage for your practice. There are a few passive balanced solutions offered in the Canadian market that do not typically make trades within the portfolio. Looking at 3 of the top 4 solutions by AUM in Canada shows that over the last 4+ years, the total return difference is only 2.5%.

Passive Parity - Total returns since February 2019

But what separates you from competitors is putting your DNA on the portfolio. Perhaps you felt the portfolio should have a higher percentage in US equities or more high-yield credit in the fixed-income sleeve. A large percentage of that decision will be determined by a few factors: your client base, whether they are just starting their investment journey, at peak, or in the decumulation phase, and their risk level. Any bets you make in the portfolio should be allocated appropriately. Those active decisions will not always work out, but with a detailed investment process and strategy, the aim is to be right more than you are wrong.

Having a process for investing and delivering that process to clients in a digestible manner will set you up for success. Indeed, some clients do not care to get into the nitty-gritty of the investment process, but as you move up the net worth scale, clients are typically more informed and want to understand the strategy that goes into their portfolio. With the base of our process laid out already, there is an opportunity to implement a more enhanced lens to portfolio decision-making such as Factor Analysis.

Factor Analysis attempts to explain returns and risks within different exposures in the portfolio in hopes of enhancing diversification. There are several different levels to factor analysis so for this analysis we will keep it high level focusing on equity style factors, in hopes that this information can be translated into a resource to use with your clients.

Factor Analysis offers a multitude of advantages. Firstly, it provides a sense of reassurance by offering a clear understanding of the underlying exposures within your investments. It also equips you with valuable insights that can be seamlessly incorporated into client communications, enhancing the quality of your commentaries. Finally, it empowers you to engage in informed discussions with portfolio managers about their products, enabling more productive and insightful interactions.

The analysis can be tricky, sometimes there is incorrect or missing data and there are only a few available products that can truly digest the underlying data. Once you have an official output it can seem overwhelming, so let's break it down in a simple manner and explain a few of the different factors that are valuable. With high concentration amongst the US equity market, a popular discussion topic has been equal weight vs. market weight S&P 500 index. From a factor perspective, the decision to invest in one or the other has an impact on your portfolio. Sometimes it’s a good impact, like in 2022, and sometimes bad, like this year so far.

Factor Tilts


Size focuses on the market capitalization of the underlying investments. Typically, smaller cap can provide greater returns but also comes with some additional risk. That is unless, in the investor’s mind, the risk of highly concentrated technology stocks outweighs that risk. It makes sense as you equal weight the mega-cap stocks the overall size of the portfolio will be smaller, affecting the portfolio materially.


Momentum is about the rate of acceleration of the underlying securities. The chart shows that the S&P 500 Market weight index moves more strongly with the momentum factor, which makes sense given the higher concentration of technology stocks.


The quality factor holds more emphasis on fundamentals. The focus is on balance sheets, low debt, consistent earnings, etc. On the factor tilt look through, neither index shows a statistical difference between the solutions.


The most used style factor is value growth. Value is rooted in the valuations and earnings yield of the underlying securities. While growth is more focused on achieving high growth metrics on sales and earnings. There are a time and a place for both factors but if an investor believed more heavily in the future of the value factor, equal weight would be a much more applicable choice than market weight.


Volatility comes down to risk-adjusted returns and price fluctuations, some statistics show lower volatility investments earn higher risk-adjusted returns. Interestingly enough, when it comes to volatility, there is not a statistical difference from a factor perspective between market cap and equal weight.


Liquidity focuses on a high share turnover as well as a low bid-ask spread on the underlying investments. In fairness, we are talking about the top 500 companies within the United States, so these investments are not going to have a problem when it comes to liquidity. This factor is used much less but can have a larger impact when factoring in private investments to a portfolio.


This factor pertains to the dividend yield on the underlying investments. The smaller cap index likely has a higher tilt towards dividends as very few of the mega-cap investments pay a dividend. The more value in the portfolio typically coincides with a higher exposure to the dividend factor.

There are many ways to enhance your portfolio process, factor analysis is simply a tool in the toolbox, albeit a powerful one. Once you have the factor exposures for all the equity investments in your portfolio you can score the overall portfolio from a factor perspective. By harnessing the insights gained through factor analysis, investors are better equipped to navigate the complexities of financial markets, make data-driven decisions, and construct portfolios that align with their objectives and risk tolerance.

Insights with Purpose

At Purpose, we are attempting to change the status quo within the investment industry – namely the enigmatic standards by which the industry operates. We are an open book when it comes to portfolio design and discussions surrounding our outlook and strategies. We want to make managing portfolios simpler for advisors and act as a sounding board for ideas. We start by running portfolio comparisons between your portfolios and ours. Not to say ours is right and what you are doing is wrong, but to understand the differences and have discussions surrounding the rationales. We aim to keep this discussion going quarterly, and this is not a one-and-done service. We want to build our relationships with advisors so that the end client has a satisfactory investment experience.

If you want to know what exposures your equity portfolio is tilted toward, feel free to reach out to our team at

As the great Peter Lynch once said, “Know what you own and why you own it.”

— Brett Gustafson is a Portfolio Analyst at Purpose Investments

Sources: Charts are sourced to Bloomberg L.P.

The content of this document is for informational purposes only and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document, and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable; however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature depend on or refer to future events or conditions, or include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are, by their nature, based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Brett Gustafson

Brett is a Portfolio Analyst at Purpose. He is responsible for relationship management and advisor support and focuses heavily on portfolio analytics for advisors, our own proprietary models, as well as equity research. With over nine years of experience in the investment industry, Brett started his career out as an Investment Advisor at a Canadian independent asset management firm where he cared for several high-net-worth families. Brett graduated from the University of Calgary with a Bachelor of Commerce degree. He is currently pursuing his CFA designation with the goal of becoming a Portfolio Manager.