Kolkata: Factor investing is an investment approach which picks securities based on specific characteristics determining risk and return. It has been designed to manage risks and boost returns and simultaneously attempt diversification by focusing on particular factors.
Analysts often point to two major types of factors that influence investments. These are macroeconomic — GDP growth, rate of inflation, rate of rate — and style factors such as value, growth, low volatility, quality and momentum.
The significance of “quality”
The quality factor is generally measured in term of certain metrics — whether debt is manageable, steady earnings and asset growth is consistent. Seasoned investment strategist Prasunjit Mukherjee, the CEO of myplexus.com thinks “Quality does something a lot more substantial to the value style.” “It looks into the price movement of a scrip and grinds down to what the rise/fall can be attributed to. It further grounds down to what is systematic and what is chance. It is not a wholly different style (although many would opine differently) but to my mind it is an improvement on the value investing method,” he adds.
This aspect undertakes a deep analysis into how a company manages to stay ahead of the competition and how it sets prices that competition is unable to do. “Of course these take into account the economic factors too. There are quality indices which aide passive investments and then there are many who create their own quality portfolios too,” he explains.
Indices catering to the factor style
The myplexus.com boss points out that factor investing is not only becoming popular but also turning out to be so significant that even indices are being crafted to cater to the factor style. “In the last 12-18 months, there has been a profusion of style factors used in investing used in fund management. Although many of us would not be familiar with the terms now, it is only a question of time before that happens,” he forecasts. According to him the popular indices in this category are Low volatility 30, Equal Weight, Alpha funds, Momentum pro etc.
Other factors are value, momentum, volatility etc. Low volatility is preferred. Momentum factor suggests that those performing earlier well are likely to maintain it in future. The value factor assumes that businesses with lower valuations can generate higher returns.
“Growth” and “Value”
Mukherjee points out that growth is “chasing the returns matrix of companies working”. “A growth investor will look into the movement of earnings per share, earnings indexed to growth rates, Return of Equity and Return on investment. There are fancy spin offs from time to time like Growth at Reasonable Price (duh isn’t that Value), but when the idea is to confuse and sell, these monikers come handy,” he says.
A value investor, on the other hand, will look into more fundamental aspects of the company and the industry. “If the current price of the stock has a gap to the investor’s determination of the “right value”, then that would signal a buy signal to the investor. And of course, vice-versa,” says Mukherjee and argues, “so the value is not really an improvement on the growth style, it is to put it simple, another style.”
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Factor investing is an investment approach which picks securities based on specific characteristics determining risk and return. It has been designed to manage risks and boost returns and simultaneously attempt diversification by focusing on particular factors. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
