Multi-Factor Models: The Smarter Way to Invest in 2025

Why do some investors consistently outperform the market? In 2025, the answer often lies in leveraging multi-factor models—sophisticated tools that blend data, discipline, and a dash of maths to reveal the true drivers of investment returns.

What Are Multi-Factor Models?

Multi-factor models are quantitative frameworks that help investors assess and predict the returns of an asset by considering multiple risk and return factors. Unlike traditional models, which might focus solely on market beta (how an asset moves relative to the market), multi-factor models account for a range of influences—from value and momentum to size, quality, and even macroeconomic variables.

• Value factor: Stocks trading below their intrinsic value tend to outperform over time.

• Momentum factor: Securities with recent positive returns often continue to do well in the near term.

• Size factor: Smaller companies may deliver higher returns than their large-cap peers.

• Quality factor: Firms with strong balance sheets and steady earnings are often favoured.

In 2025, Australian fund managers are increasingly using multi-factor models not just for equities but also for bonds, real estate, and alternative assets.

Why Are Multi-Factor Models Gaining Ground in 2025?

Several trends have turbocharged the adoption of multi-factor models in Australia:

• Volatile markets: The ongoing global inflation pressures and shifting interest rate outlook have made single-factor investing riskier.

• Superannuation regulation: APRA’s latest performance benchmarks encourage funds to demonstrate robust, risk-adjusted returns, driving the uptake of more sophisticated modelling.

• ESG integration: Many multi-factor models now incorporate environmental, social, and governance (ESG) factors, reflecting both regulatory push and investor demand.

• Tech advances: AI-powered analytics and big data have made it easier to process huge volumes of market information and refine factor strategies in real time.

For example, several major Australian super funds revamped their default investment options in early 2025, explicitly citing the use of multi-factor models to better manage downside risk and enhance long-term growth.

How Do Investors Use Multi-Factor Models?

Multi-factor models are no longer just for institutional investors. Retail platforms and robo-advisers increasingly offer factor-based portfolios, making these strategies accessible to everyday Australians.

• DIY investors: Many online brokers let you filter and construct portfolios based on factors like value, momentum, and ESG scores. For instance, you might tilt your ASX portfolio towards undervalued small-caps with high-quality earnings.

• Super funds: Some industry super funds now disclose their portfolio factor tilts in member reports, showing how they blend factors to manage risk in turbulent times.

• ETF growth: The Australian ETF market saw a record inflow into factor-based funds in Q1 2025, as investors sought smarter diversification amid market uncertainty.

Real-world example: Imagine an investor in 2025 allocating $50,000 across three ASX-listed ETFs—one tracking value stocks, another focused on momentum, and a third on high-quality companies. By blending these, the investor reduces reliance on any single market driver, potentially smoothing returns and lowering risk.

What’s New in Policy and Practice?

The investment landscape is evolving fast. In 2025, ASIC released new guidance on product disclosure for factor-based managed funds, aiming for greater transparency in how these products operate and what risks they involve. APRA also signalled it will scrutinise super funds’ use of quantitative models as part of its annual performance assessments.

Meanwhile, investor education is catching up. ASIC’s Moneysmart platform added a dedicated module on multi-factor investing in early 2025, reflecting the growing importance of these models for both professionals and individual investors.

Risks and Considerations

While multi-factor models can enhance portfolio construction, they’re not foolproof. Key risks include:

• Model risk: If the underlying data or assumptions are flawed, the model can misfire.

• Factor crowding: If too many investors chase the same factors, returns can diminish or even reverse.

• Changing correlations: The relationship between factors can shift rapidly, especially in global crises.

Staying informed about both the strengths and the limits of these models is critical—especially as more Australians embrace data-driven investing.

The Bottom Line

Multi-factor models are changing the game for Australian investors, providing powerful tools for managing risk and pursuing returns in a complex 2025 market. Whether you’re a super fund member, ETF enthusiast, or curious DIY investor, understanding how these models work—and how to use them—can help you build a portfolio that’s fit for the future.