These funds combine the benefits of passive index investing with the sophistication of active management, leveraging decades of financial research to target specific drivers of return. 

In today’s unpredictable world, we’re noticing clients are increasingly keen to chat about our enhanced index solutions. In this article, we address some of their most frequently asked questions about factor-based investing.

1. What are factor-based funds?

Our factor-based enhanced strategies build on the foundation of traditional indexing, but incorporate active elements to seek outperformance, typically through subtle tilts or adjustments. The strategies systematically target specific ‘factors’.

2. What are factors?

Factors are measurable characteristics of stocks that can explain differences in their returns.

The factors implemented by our enhanced index team are value (inexpensive stocks), momentum (stocks with positive price trends) and quality (financially healthy companies).

3. How do you build a factor-based portfolio?

We assess the multi-factor characteristics of each and every stock in the index. We bias the portfolio towards stocks with positive exposure to the target factors and away from stocks with negative characteristics.

By blending the discipline of indexing with factor-driven insights, enhanced index funds aim to deliver better risk-adjusted returns at competitive fees.

4. Why don’t you have growth as a factor?

Our momentum factor will bias towards growth if it has positive prospects and our quality factor has elements of growth, specifically because we look at changing earnings. However, we don’t target growth directly as there is less evidence of long-term outperformance of this as a stand-alone factor. 

5. Do the factors work across geographies?

In short yes. However, each region has different nuances and opportunity sets, so the factors don’t all perform in the same way at the same time. For example, value has worked particularly well in emerging markets but less so in the US over more recent years.

6. Is there any evidence that factor investing works?

The intellectual backbone of factor-based investing comes from decades of academic research, notably the work of Nobel laureates like Eugene Fama and Kenneth French. Their studies identified that certain factors, beyond just market risk, explain a significant portion of stock returns. For instance, value stocks—those trading at low multiples relative to earnings or book value—have historically outperformed growth stocks over long periods.

Factor-based enhanced index funds harness this evidence, using rules-based methodologies to tilt portfolios toward factors. These strategies are systematic, transparent, and grounded in data. This reduces the risk of human bias while keeping costs lower than those of traditional actively managed funds.

7. Is enhanced index investing new?

Enhanced index investing isn’t new. Many large institutional asset owners have been using these types of strategies for a number of years.

8. How do enhanced index strategies balance risk and reward?

One key advantage of factor-based enhanced index funds is the potential to improve risk-adjusted returns. By diversifying across multiple factors, investors can mitigate the cyclicality inherent in any single factor.

For example, while value may underperform during growth-driven bull markets, momentum or quality might offset this. This multi-factor approach aims to smooth out performance over time, offering a more consistent experience than betting on one factor or the broader market alone.

9. Aside from outperformance potential, what’s the benefit?

Factor-based funds retain the diversification benefits of indexing. For example, the abrdn World Equity Enhanced Index Fund will still hold a broad basket of stocks from its chosen benchmark, but will overweight those constituents with a strong multi-factor score and underweight those with a lower score.

This reduces idiosyncratic risk (the risk tied to individual companies) while focusing on the factor premium, striking a balance between passive stability and active upside.

However, all investing comes with a variety of potential risks. Having a full view on all risks in a portfolio is key to ensuring that relative performance is driven by your intended sources of return (factors) and not by a particular risk event or theme.

We seek to identify and neutralise additional unwanted ‘risk factors’ by regularly updating the portfolio positions, with the aim of ensuring that fund performance is driven by the combination of our quality, value and momentum factors.

10. What are the factor-based funds in the Aberdeen Investments range?

All our Enhanced Index Funds are rated by RSMR. 

*AMC = annual management charge **OCF = ongoing charges figure. Charges shown are for B Acc share class as at 28 February 2025. Click through to find full fund details and important information.  

Blending the best of active and passive

We believe our enhanced index equity funds represent a smart evolution in investing, because they blend the best of passive and active investing.

For more information about our enhanced index fund range, visit our website or speak to your local Aberdeen Investments business development director.