In our post on Diversification and our recent 60/40 vs S&P 500 analysis, we explored why diversification matters and how portfolio construction shapes the investor experience.
But diversification is not only about how many funds you own. It is also about what drives them underneath.
This post looks inside global equities using the “Factor Investing” lens and asks a simple question: are you really diversified if all your stocks behave the same way?
This piece was inspired by a recent discussion on what “real” diversification looks like inside an equity portfolio and why correlation becomes critical when markets turn by Harald Berlinicke, CFA.
What Are Equity Factors?
Equity factors describe shared characteristics that explain why groups of stocks tend to move together over time.
Instead of focusing on individual companies or sectors, factor investing looks at the traits that drive returns, risk, and investor behaviour across full market cycles.
In this article, we focus on four widely used equity factors within the global stock market, measured using MSCI ACWI Net Total Return indexes in U.S. dollars.
- Quality – Quality focuses on companies with strong balance sheets, stable earnings, and efficient use of capital. These firms tend to be more resilient during economic slowdowns because they rely less on external financing and have more predictable cash flows. Investors often gravitate toward Quality when uncertainty rises. (Source: MSCI Quality Index)
- Momentum – Momentum captures stocks that have performed well recently and tends to reflect market trends and investor behaviour. When markets are confident and leadership is narrow, Momentum often benefits as capital continues to flow toward recent winners. However, momentum can reverse quickly when trends break. (Source: MSCI Momentum Index)
- Minimum Volatility – Minimum Volatility aims to reduce portfolio swings by selecting stocks that historically fluctuate less than the broader market while maintaining diversification. These stocks often include defensive businesses and stable cash generators. The goal is not to eliminate risk, but to smooth the ride. (Source: MSCI Minimum Volatility Index)
- Value – Value focuses on companies trading at lower prices relative to fundamentals such as earnings, book value, or cash flow. These stocks are often out of favour, facing pessimism or cyclical headwinds. Value can lag for long periods, but historically has delivered strong returns when sentiment reverses. (Source: MSCI Value Index)
A factor is not a single stock or sector. It is a characteristic shared by many companies. When those companies are grouped together and tracked over time, their collective behaviour becomes visible across market cycles.
Two investors can both own “global equities,” yet experience very different outcomes depending on which factors dominate their portfolios.
What Is MSCI ACWI?
MSCI ACWI stands for All Country World Index. It represents a broad snapshot of the global equity market.
The index combines:
- Developed Markets (DM) such as the United States, Canada, Western Europe, Japan, and Australia.
- Emerging Markets (EM) such as China, India, Brazil, Taiwan, South Korea, and others.
Together, ACWI covers thousands of companies across more than 20 developed markets and 20 emerging markets, capturing the majority of the world’s investable equity opportunity set.
Developed markets generally feature more stable political systems, deeper capital markets, and more mature economies. Emerging markets often offer faster growth potential, but with higher volatility, different risk profiles, and greater sensitivity to global capital flows.
In this article, we use MSCI ACWI factor indexes because they blend both developed and emerging markets into a single global portfolio. This allows us to focus first on factor behaviour itself without introducing regional complexity.
In the next article, we will break this apart and examine how the same factors behave differently in Developed Markets versus Emerging Markets, and why those differences matter for diversification.
Chart 1: ACWI Factor Returns by Year
The first chart shows calendar-year returns for the four factors within MSCI ACWI.
Each row represents a year and each column represents a factor. Within each year, the colours highlight relative performance across factors. The return highlighted in green is the highest for that year, then blue, amber and finally red notifying the worst performing factor from the four.
Reading across each year, a few patterns emerge:
- Some years are led by Momentum.
- Other years favour Quality.
- Minimum Volatility occasionally holds up best.
- Value often lags, then surprises with strong rebounds.
The most important takeaway is how frequently leadership rotates.
There is no single factor that dominates every year, and no factor that stays permanently out of favour.
Global stocks are not one thing. Different slices of the same market can deliver very different results from one year to the next.
Chart 2: Visualising Factor Leadership Rotation
The second chart shows the same calendar-year table, with a light line overlaid to trace the top-performing factor each year.
The constant movement of the line makes one thing clear. Factor leadership changes often, sometimes abruptly.
This highlights why trying to chase last year’s winning factor can be risky. By the time leadership becomes obvious, conditions may already be shifting.
Chart 3: Growth of 100 Dollars
The next chart shows the growth of 100 dollars invested in each ACWI factor index over time.
Although all four start from the same point, their paths diverge significantly as returns compound.
Some factors grow faster but with sharper swings. Others grow more steadily but with lower peaks. The journey matters as much as the endpoint.
What This Teaches Beginners
- Factors rotate. Leadership changes frequently.
- There are no permanent winners. Outperformance is cyclical.
- Your experience depends on your factor mix. The same market can feel very different.
- Diversification is about drivers, not just tickers.
You do not need to become a factor expert. Simply recognising that different forces shape global equity returns is already a meaningful step forward.
What Comes Next
In the next article, we will compare Developed Markets and Emerging Markets using the same factor lens.
You will see how the same Quality, Momentum, Value, and Minimum Volatility factors behave very differently across regions, and why that matters for true diversification.
All charts are based on MSCI ACWI Net Total Return factor indexes in U.S. dollars using monthly data. This content is for educational purposes only and does not constitute investment advice.
Disclaimer:
The content on this blog (“Zorroh”) is provided for informational and educational purposes only. It is not investment, financial, tax, or legal advice. Past performance is not indicative of future results. Investing involves risk, including loss of capital. Always conduct your own research or consult a qualified professional.