Factor Investing: An Empirical Analysis of Factor Allocation Strategies for Retail Investors

Factor investing is positioned as an intermediate solution between passive and active portfolio management. The advent of factor-based ETFs that track rule-based factor indexes, such as the MSCI factor indexes analyzed in this work, has enabled retail investors to gain factor exposure efficiently and capture long-term risk premiums. This practical implementation is the central motivation of the thesis. MSCI factor indexes, used as a proxy for the ETFs available to European investors, are combined to build five portfolios: Aggressive, Conservative, Core Multifactor, Academic Factor and Factor Equal Weight. The portfolios are backtested over the period 2001-2025 and compared with the broad-market benchmark MSCI World using CAGR, annualized volatility, Sharpe ratio and a set of drawdown metrics. The primary objective is to evaluate whether factor-based strategies can outperform the benchmark on a risk-adjusted basis. The empirical results show that four of the factor-based portfolios outperform the MSCI World on a risk-adjusted basis (Sharpe ratio), whereas the remaining portfolio, Conservative, achieves a Sharpe ratio equal to that of the benchmark. A bootstrap analysis, performed to assess the statistical robustness of these results, shows that the difference in Sharpe ratio is statistically significant for only two of the five portfolios (Aggressive and Core Multifactor). An additional robustness check restricted to the post-index-launch period of each portfolio’s constituent indexes, shows that the CAGR active differential relative to the MSCI World is non-positive for all five portfolios, ranging from -1.99 pp (Conservative) to -0.01 pp (Aggressive). Overall, the evidence of risk-adjusted outperformance is dependent on the combination of factors selected and highly sensitive to the choice of sample period, given the cyclicality of factor performance. Finally, the study acknowledges other critical methodological limitations such as some investability constraints within the UCITS environment and the reliance on the MSCI framework.