The segment of investments which focuses on factors, precisely, for the primary reasons of managing risk, increasing returns/profits and minimizing the risk of investments is called Factor investing. This is a strategy which is aimed towards preferential selection of securities on attributes that are associated with higher returns.There are two main types of factors that drive investments, returns of stocks/ bonds and other factors;
Former factors are aimed at capturing broader market risks across asset classes, while the latter, are directed towards ascertaining significant returns and risks within asset classes. The same factors can also be verified as the former capturing risk on inter-market assets and the latter on intra-asset class.
While macro factors include the pace of economic growth and assessing the rate of inflation in order to explain returns across asset classes like equity or bond markets. Common macroeconomic factors include credit, inflation, and liquidity whereas style factors embrace style, value, and momentum-to name a few.
Style factors can help explain returns within those asset classes such as value stocks, investor style embracing, value and momentum - to name a few.
Factor investing is designed to enhance fertile diversification, generate above-market returns and manage risk appropriately. Through making investments based on factors, portfolio diversification can integrate and ensure safety from offset potential risks by targeting broad, persistent, and long recognized drivers of returns
Factors are the foundation of investing. Similarly, understanding the factors that drive returns in your portfolio can help you to choose the right mix of assets and strategies for your needs. The study of factors helps us develop portfolios that best suit individual needs. However in order to understand how these factors have driven returns for decades now, we must look closely at three significant tenets that are key drivers of factor investments:
There are certain factors that earn additional returns because they involve bearing additional risk. In the same manner they may also under-perform in varied market regimes.
When we observe the markets closely, there are many market rules or restrictions that define certain investments off-limits for some investors. This in turn creates opportunities for others who can invest in them without those constraints.
These include those factors that capture investor's behavior and actions relatively true to an investor, but those, which may not always be perfectly rational to the market or general investment behavior.
Willingness to choose or make certain investment choices, even though they may not have supported best returns in the past or to other similar investors, is solely driven by investment rationale These behavioral biases can give rise to investment opportunities for investors who can manage contrarian viewpoint.
Many Institutional investors, managers and family offices worldwide have been using factors to manage portfolios for decades. However, the usage of data and technology has democratized factor based investing, extending a comprehensive coverage and access to all investors across the globe. With technology there is tremendous development of smart factors, enhanced factor strategies, risk analysis mechanisms and smart beta.
Smart beta strategies solely concentrate on factors that use a rules specific approach with a predetermined goal of outperforming market-cap weighted benchmarks. These strategies are now widely available in ETFs and mutual funds, which makes factor strategies both affordable and accessible to every investor.
In the case of enhanced strategies, factors are used in more advanced manners by trading across multiple asset classes and making strategic investments in both long and short term. Many Institutional Investors use these enhanced factor strategies in order to achieve absolute returns, accentuate and complement hedge fund and conventional active strategies.
Selenine Investments are at the forefront of factor-based investments and developing innovative new strategies to help address high valued clients’ investment challenges.
Selenine Investments offers multitude ways to implement time-tested principles of factor investing. Our focus includes target date funds, factor ETF's, multi-asset - multi factor strategies and efficiency based solutions to HNWI's & Institutional Investors