We’ll review the basics of factor investing, then we’ll see how those same principles may help you build a better fantasy-football team. If your draft is coming up soon, be sure to check out FIGURE 6 for some players to consider.

What Is Factor Investing?

Factor investing is based on the premise that you can understand what’s driving investment returns if you look at the underlying characteristics of the stocks in the portfolio. While there are several factors that can influence investment returns, the five below are the most differentiated and backed by academic research, economic logic, and long-term evidence from practitioners:

Factor investing seeks to identify the underlying characteristics that drive stock returns. 

Historical Factor Returns

All the factors above have exhibited distinct performance characteristics for more than a century.

To quote Warren Buffett, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil (and inflation) shocks; a flu epidemic; and the resignation of a disgraced president (and the assassination of another). Yet the Dow rose from 66 to 11,497.”¹

He could have added that his tried-and-true investing principles, such as investing in great companies (quality) at good prices (value) while attempting to minimize losses (low volatility), worked more often than not, over that entire period.

Though it’s true that these factors have worked over time, they haven’t worked all the time. This highlights the need for diversification, not only among your investment holdings, but within your investment holdings.

Different investment factors have behaved differently across different market cycles, inflationary regimes, and other environments—not unlike how different players perform differently based on opponent, scheme, and surrounding cast.

Building a Long-Term Portfolio with Factors

Let’s say you want to build a long-term portfolio that has outperformance potential but is also risk-conscious.

You might start by looking for companies that are trading at attractive valuations (the value factor). But value alone isn’t enough because some companies trade at low valuations for good reason.

Then you’d further refine your list by only including companies that have a history of profitability and deploying capital wisely (the quality factor).

Momentum can be the most fickle and fleeting of the factors: here today, gone tomorrow.

Momentum is another attribute you may consider as shorter-term trends often persist; however, be aware that momentum can be the most fickle and fleeting of the factors: here today, gone tomorrow.

Finally, you could overlay a couple of additional factors (small size and low volatility) depending on your goals for additional upside, albeit with higher risk, emphasizing relatively smaller companies―or calibrate risk down using the low-volatility factor so the portfolio can potentially perform better during more challenging, higher-volatility periods.

That’s the big idea behind factor investing: diversification across a variety of sources of return, though asset managers who incorporate this investing style execute it in different ways.

Market Cycles and Inflation Environments Influence Factor Returns

Rising or above-trend inflation has historically benefited value stocks and smaller-sized companies, while falling or below-trend inflation has historically benefited higher-quality, larger companies.

The past 55 years of market cycles, separated by recessions, reveal some consistent performance traits:

1. Early in the market cycle, the value and size factors consistently performed the best, and as you get to the belly of the bull market, value has been the strongest performer.

2. Quality historically gained strength the longer the bull market lasted because broad GDP and earnings tend to slow late in the cycle . As a result, companies that can continue to grow, due to their pricing power and profitability, become more scarce.

3. During the bear-market drawdowns, lower-volatility stocks (i.e., those with more stable share prices) and stocks with cheaper valuations (i.e., those with less room to fall) have weathered past storms the best.

In our view, high-upside players in fantasy football are similar to the momentum factor, steady-eddie players are similar to the quality factor, and undervalued players are similar to the value factor. 

How Might These Factors Apply to Fantasy Football?

When you’re building your fantasy-football team, you need different contributions across your entire team over the course of a season when you’re facing opponents of varying difficulty, inevitable injuries, and, of course, bye weeks!

Low Volatility – If you try to build a team that’s only made up of super-consistent, steady-eddie players, your team will have a decent floor but may not have enough fire power to win a championship. This is akin to building a portfolio with only low-volatility stocks.

Quality – A roster filled the highest-quality players sounds appealing until you remember there are constraints acting like a budget. This means a great player could still cost you too much for the points they (may or may not) provide.

Value – Players who have a low price or are available in late rounds may not look appealing on the surface, but as you dig deeper, you may find their previous poor performance was due to a lingering injury, a poor supporting cast, or scheme issues―and a new environment may unlock a gem.

Momentum – Boom-and-bust players are like the momentum factor in factor investing. Maybe a player is only used in goal-line situations, so all their points come from touchdowns. Or think of an explosive receiver who doesn’t get a high volume of targets but can hit paydirt once or twice a game, several times a year.

Small Size – Players in their first couple of years in the NFL often need time to establish their ability to produce for their teams and fantasy owners. Likewise, a stock that’s smaller may be less well-known because it hasn’t been a publicly traded company long enough to establish a track record that rivals its larger-cap siblings.

FIGURE 5 looks back at the 2023 season to show examples of players who typified each factor.

In FIGURE 6 we pull out our crystal ball for the 2024 season and predict which players might typify the five factors.

From Fantasy to Reality

Combining players that exhibit a variety of different characteristics can help you build a fantasy-football team worthy of that coveted, always corny, trophy that your league still uses. Likewise, building a portfolio of companies using a variety of attractive attributes could potentially be an investment approach built to weather the inevitable storms for the long term. 

Figure 2 Portfolio Definitions

Figures 3 and 4 Portfolio Definitions

¹ Source: “Buy American, I Am.” The New York Times, 10/16/08