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Market Update

Does Factor Profile Diversification Still Work?

Correlations for the major factor profiles are relatively high, but they can still show different returns in different types of markets.

In our recent examination of asset-class correlations, the "2021 Diversification Landscape," we found that correlations for the five major factor profiles-- value, small-cap, momentum, quality, and low volatility--are all relatively high, but there's still a case for diversifying by factor.

Factor profiles are another way of measuring the underlying factors that help drive equity market returns. Since the 1990s, asset managers and other researchers have focused considerable effort on trying to identify additional characteristics (beyond traditional metrics such as sector, market cap, and value/growth) that help to explain investment management styles and resulting performance differences. Theoretically, each factor should have its own set of performance characteristics and succeed or fail in different types of market environments.