FACTOR INVESTING

Origin of Factor investing

- By: Shally Gang Head-Products, Tata Asset Management

In search for 'what drives the risk and return of a stock' or in what manner can a stock's return be explained, various factors were discovered. Base was formed from the thought that every stock has some level of sensitivity to the movement of the broader market, which is measured as Beta. Later academics and practitioners discovered factors and exposures that drives returns of stocks, aside of market exposure or Beta - smart betas like valuation of a company, size of a company, Growth of a company, low volatility, Quality, Dividend Yield. Only those parameters that influence return persistently over time, across sectors, geographies and have an economic rationale. Momentum and Alpha factors came in later. Availability of high-quality corporate data spanning more than three market cycles seems to be an enabler for Factor investing.

How are various factors measured

Value factor considers stocks with low prices relative to their fundamental value, Quality picks stocks with lower debt, good quality of earnings and high RoE (Return on equity), Low Volatility factor includes stocks with lower-than average volatility. Momentum chooses stocks with stronger past performance while Alpha picks stocks with most outperformance over its Universe index in the past.

Performance of Factors in various regimes

Market Cycles