As investors, we seek to build diversified equity exposure with the objective of achieving higher returns with lower risk profiles and better diversification than broad equity markets.
What are Factors?
“There is no free lunch attached to factor investing.”
- The factor is grounded in academic literature and vetted through the scientific method over decades;
- The factor is robust across definitions and geographies;
- The factor has a credible, economic rationale to offer a persistent risk-adjusted return premium.
The six common consensual factors that decades of research have shown to have the potential to deliver excess returns are:
- Value
- Low Volatility
- High Momentum
- Low Investment
- High Profitability
- Market Cap Size
“Diversification across factors has historically reduced the length of periods of underperformance by any one individual factor.”
Value
Book-to-Market Ratio
High Momentum
Cumulative Return Over Last 12 Months excluding Last Month
High Profitability
Past Year Gross Profit / Total Assets
Low Volatility
Weekly Volatility Over the Past 2 Years
Low Investment
Growth of Total Assets Over Past 2 Years
Size
Free-Float Adjusted Market Cap
| Factor | Historical Risk | Historical Correlation | Historical Business Cycle |
|---|---|---|---|
| Value | Comparable to market | Low with Momentum and Quality | Pro-cyclical |
| Momentum | Comparable to market | Low with Value, Yield and Quality | Pro-cyclical |
| Low Size | Comparable to market | Low with Min Volatility, Yield and Quality | Pro-cyclical |
| High Profitability | Comparable to market | Low with Value, Size, Yield and Momentum | Defensive |
| Low Investment | Comparable to market | Low with Value, Size, Yield and Momentum | Defensive |
| Low Volatility | Comparable to market | Low with Value and Momentum | Defensive |
There is no free lunch associated with factor investing. While factor indices have exhibited excess risk-adjusted returns over longer periods, over shorter horizons factors exhibit cyclicality, including periods of underperformance.
Diversification across factors has historically reduced the length of periods of underperformance by any one individual factor. This is no different from the diversification investors get in their portfolios from different asset classes or geographic regions.
Utilizing Multi-Factor Strategies
In the Counsel Strategic Portfolios, our factor-based index partner Scientific Beta* manages three regional multi-factor strategies: Canada, U.S., and International. The strategies provide us with our desired multi-factor exposure in each of those geographic regions – helping our investors benefit from more effective diversification that may result in better performance.
Why Multi-factor Strategies are Especially Relevant Today
Market concentration has reached historically elevated levels, with a small number of large-cap stocks driving a disproportionate share of equity market returns. While this narrow leadership has benefited cap-weighted benchmarks in recent years, it introduces significant risks for long-term investors. The current environment resembles previous periods of extreme concentration, where a handful of stocks commanded premium valuations and dominated index performance—often followed by subsequent underperformance and broader market mean reversion.
Recent research by Scientific Beta highlights that the top 10 largest stocks in the U.S. now trade at price to earnings valuation multiples higher than 90% of the periods since the 1970’s.
These stocks not only exhibit higher volatility, but their return profiles are more closely tied to market-wide swings and idiosyncratic events. The implication is clear: portfolios heavily exposed to the largest stocks carry less diversification and more concentration risk than many investors may realize.
This backdrop reinforces the role of multi-factor strategies as a more balanced and risk-aware alternative. By design, multi-factor portfolios allocate across a broader set of companies based on persistent drivers of long-term returns—such as value, quality, and low volatility—rather than company size or past performance. This is designed to lead to better diversification across sectors, capitalizations, and sources of return, reducing reliance on the continued outperformance of a select few stocks.
For investors looking to build resilience into their equity allocations, multi-factor strategies help mitigate the unintended risks of cap-weighted approaches. In an environment where market leadership is increasingly narrow and valuations among mega caps are stretched, the case for factor diversification is even more compelling.
Conclusion
Our current research indicates we may obtain a higher long-term return compared to a market-cap-weighted index by tilting toward the six most rewarded factors. Second, we believe we achieve more effective diversification by avoiding reliance on any single strategy or dominant group of stocks to drive performance across market environments. This is especially important today, as market concentration has reached historically elevated levels and the largest stocks trade at stretched valuations. Lastly, employing multi-factor strategies may enhance the risk-adjusted performance of our portfolios by helping to minimize exposure to unrewarded risks. All in all, the addition of these strategies strengthens the resilience of our Counsel Strategic Portfolios and improves the probability of long-term investment success.
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
Disclaimers:
*Scientific Beta is the provider of the factor-based index strategy employed by Counsel Multi-Factor funds and Counsel Enhanced Global Equity sub-advisors and licensed to Canada Life Investment Management Ltd.
The views expressed in this commentary are those of Canada Life Investment Management as at the date of publication and are subject to change without notice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of June 24, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Counsel mutual funds are managed by Canada Life Investment Management Ltd., a wholly owned indirect subsidiary of The Canada Life Assurance Company (“Canada Life”). Canada Life is a wholly owned subsidiary of Great West-Lifeco Inc. (TSX: GWO) and a member of the Power Corporation Group of companies.
The SciBeta Global CLIML CW Hist-Vol Adjusted Index, SciBeta Developed ex USA ex Canada CPS Core-E5G High-Factor-Intensity Diversified Multi-Beta MultiStrategy 6-Factor 4-Strategy EW Index, Scientific Beta Canada CPS Core-ESG High-Factor-Intensity Diversified Multi-Beta Multi-Strategy 6-Factor 4-Strategy EW Index, and SciBeta United States CPS Core-ESG High-Factor-Intensity Diversified Multi-Beta Multi-Strategy 6-Factor 4-Strategy EW Index are the intellectual property (including registered trademarks) of EDHEC Risk Institute Asia Ltd and/or its licensors, which is used under license within the framework of ERI Scientific Beta activity. The Counsel Enhanced Global Equity Fund, Counsel Multi-Factor International Equity Fund, Counsel Multi-Factor Canadian Equity Fund, and Counsel Multi-Factor U.S. Equity Fund that replicates fully or partially the SciBeta Global CLIML CW Hist-Vol Adjusted Index, SciBeta Developed ex USA ex Canada CPS Core-E5G High-Factor-Intensity Diversified Multi-Beta MultiStrategy 6-Factor 4-Strategy EW Index, Scientific Beta Canada CPS Core-ESG High-Factor-Intensity Diversified Multi-Beta Multi-Strategy 6-Factor 4-Strategy EW Index, SciBeta United States CPS Core-ESG High-Factor-Intensity Diversified Multi-Beta Multi-Strategy 6-Factor 4-Strategy EW Index is not sponsored, endorsed, sold or promoted by EDHEC Risk Institute Asia Ltd and its licensors and neither EDHEC Risk Institute Asia Ltd nor its licensors shall have any liability with respect thereto.
