Investing isn’t necessarily just about picking individual stocks or investing in the broad market.
Some investors use factor investing.
As the name suggests, it’s an investment strategy that focuses on specific drivers of returns called ‘factors’.
These factors are measurable characteristics that have the potential to lead to higher returns over time.
But could factor investing help you beat the market in 2025?
Here, we explore four widely used factors – Growth, Value, Smaller Companies (Size), and Quality – what they mean, how they work, and why they might offer an investing edge in the years ahead.
This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Remember, all investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
Growth – investing in tomorrow’s winners?
The Growth factor targets companies expected to increase their earnings or revenue faster than the average – think of tech giants innovating with new products or industries undergoing rapid expansion.
Growth stocks often trade at higher valuations because investors expect strong future profits. This can make them volatile though – they might soar when expectations are met, or tumble if growth disappoints.
In 2025, growth investing remains relevant thanks to accelerating technological change, like artificial intelligence (AI), clean energy, and biotech breakthroughs.
Equally though, watch out for any higher interest rates or inflation – these can hurt growth stocks since their profits are often years away.
Investors interested in this factor could watch metrics like earnings growth rates, return on equity, and profit margins to identify promising growth companies.
Or there are professional fund managers and groups that have invested this way for decades.
Fund idea – Baillie Gifford American
We think this fund’s a great way to invest in disruptive businesses with strong growth prospects in the world’s largest stock market – the US.
The manager’s growth style of investing aims to benefit from investing in exceptional growth businesses and holding them for long enough to reap the rewards.
There are distinct themes in the fund, including the ‘future of commerce’ and ‘new enterprise’. Many of these businesses disrupt old ways of doing things.
In the future of commerce category, for example, you’ll find businesses like e-commerce platform Shopify. Other exciting companies include Cloudflare, Duolingo and Nvidia.
Investing in a relatively small number of companies, combined with the type of companies the managers invest in, can lead the fund to have larger ups and downs compared to peers. The fund also has a small amount invested in smaller companies, which are higher risk.
Value – finding stocks in the bargain bucket
The Value factor looks for companies trading below their intrinsic – or ‘true’ – worth.
This is often measured by financial ratios like price-to-earnings (PE) or price-to-book (PB).
These stocks might be undervalued due to temporary setbacks, industry challenges, a lack of expected future growth, or broader market pessimism.
Historically, value investing has been a time-tested approach. The idea is to ‘buy low, sell high’ by snapping up bargains before the market recognises their true value.
In recent years, value stocks have generally lagged growth, partly due to disruptive technology favouring growth sectors. But market cycles shift over time – value investing for example can do well in inflationary or rising interest rate environments.
This year, in markets like Europe and the UK, traditional value sectors like banks and aerospace & defence have done well.
Value investing could regain more momentum if investors favour previously unloved, or dividend-paying, companies over more speculative growth. Or if they look for solid companies with stable or recovering earnings that are trading at a discount.
Fund idea – Man Japan CoreAlpha
This fund is a classic when it comes to value investing.
The fund managers are contrarians and prefer to go against the herd by investing in larger, more-established Japanese companies that are currently unfashionable and out of favour. Their discipline in this value style sets them apart from their peers.
This means the managers tend to invest in relatively few companies, so each one can make a significant contribution to returns – although it increases risk.
Lower share price valuations are crucial to the managers’ process, and they aren’t afraid to invest in companies when others are fearful.
A good example is autos – the sector went through a tough time earlier this year after US President Donald Trump announced tariffs on Japanese carmakers. The managers saw this as an opportunity to invest, and more recently the share prices of companies like Toyota, Nissan and Honda have rebounded. There are no guarantees this will remain the case though.
Smaller Companies – potential for outsized growth
Smaller companies have outperformed larger ones over long periods – this is known as the Size factor.
The rationale is simple – small companies are often more agile, have higher-growth potential, and are less efficiently covered by investment analysts, which gives investors the opportunity to find hidden gems.
Smaller companies tend to be riskier and more volatile though, because they’re at an earlier stage of development.
In recent years, larger companies have performed better, partly because of the perceived growth potential of mega-cap tech stocks. But that won’t always be the case. Smaller companies might benefit from a robust economic recovery, or if they’re able to seize new opportunities more swiftly.
Fund idea – Barings Europe Select
This fund invests in two areas a lot of investors have overlooked in recent years – Europe and smaller companies.
This could spell opportunity though, as it means European smaller companies offer exceptional value. If their potential is recognised by more investors, this valuation gap compared with other markets could close and lead to share price growth.
Nick Williams has managed this fund for over 20 years, which makes him one of the most experienced investors in the European smaller companies sector.
While the fund focuses on small and medium-sized businesses, the manager uses a GARP (Growth at a Reasonable Price) investment style.
This means he invests in companies he believes can grow earnings steadily, but where the shares look undervalued based on the earnings potential.
Quality – investing in strong, reliable companies
The Quality factor focuses on companies with strong fundamentals – think high profitability, stable earnings and low debt.
Quality stocks tend to be financially healthy companies that can better withstand economic shocks and market volatility.
Return on equity, low financial leverage, and consistent earnings growth are some of the most popular financial metrics used to identify these types of companies.
In uncertain times, quality companies can outperform if they have durable competitive advantages and good management – they can provide important ballast against more volatile companies or investment styles.
Over the coming year, with ongoing economic and geopolitical uncertainties, quality investing offers a way to balance risk and reward.
These companies might not deliver explosive growth, but they provide steady, reliable performance over time.
Quality companies also have the potential to outperform other factors if, for example, the AI growth bubble bursts or starts to decline.
Fund idea – Liontrust UK Growth
This fund aims for long-term growth by investing in UK companies with unique advantages.
The managers think the secret to successful investing is to find the few companies with an 'economic advantage' – a sustainable edge over the competition that will allow them to earn above-average profits for the long term.
The managers believe the hardest economic advantages to copy are intellectual property, like patents and trademarks, strong distribution channels and significant repeat business.
A company must have at least one of these attributes before it's considered for the fund.
Other less powerful, but nonetheless important strengths include franchises and licenses, good customer relationships and a great company culture.
The fund has the flexibility to invest in smaller companies and derivatives which if used, adds risk.
Putting it all together
Factor investing is one way to achieve the potential for market-beating returns over the long run.
Remember though, no factor outperforms all the time.
We believe the key is diversification across factors, adapting your approach based on your preferences, and thinking long term.
Importantly, these funds might use different investment styles, but they’re run by active managers that have demonstrated an ability to perform well over the long run. As always, there are no guarantees over future performance.