An overview of equity factors from Ethic

Ethic is an SEC registered investment adviser founded in 2016 to provide technology-driven asset management services for values-oriented investors. The firm provides 'a platform for advisors and institutions to build personalised and values-aligned portfolios that balance clients’ financial goals, tax needs, and personal values'. This ability to construct customised portfolios in line with values may be of interest to faith-based asset owners, with the use of equity factors as a potential investment tool to employ in the process.

In a note out this month on equity factors (attached below), Ethic begins by defining a factor as 'a fundamental characteristic that helps explain why some stocks perform differently than others' and that 'instead of just looking at which industry a company belongs to (its sector)' they analyse it based on its traits, such as whether it's undervalued, growing quickly, or financially sound. The firm believes that these factors provide a more detailed lens for understanding risk and return.

Ethic uses a multi-factor risk model, which allows the firm to evaluate how various factors influence a stock and, in turn, a portfolio. This is a holistic approach that helps ensure that important details aren't overlooked. While both factors and sectors help classify risks, they work differently. A stock is typically assigned to one specific sector (e.g., Technology or Healthcare), and that classification is generally stable. In contrast, most stocks are influenced by multiple factors simultaneously, and these exposures can change over time. This dynamic nature means that a company's factor profile can evolve with changes in its business fundamentals or market conditions, which can in turn affect the selection of portfolio holdings.

A key attribute of using factors is the ability to 'tilt' a portfolio towards certain characteristics that an investor might seek, such as growth or value styles. This can be done in one of two ways: 1) by using a benchmark with the factor(s) 'Integrated', i.e., a benchmark that already reflects the desired factor exposure, or 2) by using a broader benchmark and tilting toward the desired factor(s). The second approach provides greater flexibility. Ethic can also take a custom benchmark and apply tilts toward the desired factors during the optimization process, allowing for a more customized strategy.

For faith-based investors seeking to express particular values in portfolios, approaches such as the use of factors may provide a useful portfolio construction tool.

Of course, integrating factors tilts adds a layer of complexity to portfolio management and comes with inherent trade-offs including restricted security selection and the balancing of multiple goals – the kind of granular customisation that can be reflective of organisations that invest with their beliefs, teachings and values in mind.

For more on equity factors, download the note below Unlocking Investment Potential: An Overview of Equity Factors. And as always, for support developing your organisation's faith-aligned Investment Policy and Guidelines, FaithInvest stands ready to assist; find out more on the IP&G Assessments page of our website.

Ethic_Factors_3Q25.pdf

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