While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Invesco Inclusive: Fear Factor
Despite being quite simple in its definition, inconsistent reporting, differing approaches and the dominance of market-cap-weighted funds has meant that factor investing remains among the most misunderstood of investment concepts.
Broadly defined, factor investing involves tailoring your investment approach such that it targets the characteristics of companies that have been shown to persistently deliver better returns than the market. The performance of every fund, ETF and portfolio can be broken down into factors, which explain the majority of returns in any given period.
Whether they know it or not, “everyone is a factor investor,” according to Ashley O’Connor and Ritchard Longmire of Invesco Australian Equities, highlighted by the fact that the market itself is aligned to a single factor; that being market capitalisation, or “size.”
In the new podcast series launched by the Invesco Australian Equities team, titled Fear Factor, the team seeks to demystify and remove the perception that factor investing is a “black box.”
The series includes conversations with industry thought-leaders, including Steven Tang, head of consulting at Zenith Investment Partners, Professor Deep Kapur of Monash Business School, and Will Hamilton, managing partner at Hamilton Wealth Partners.
One of the biggest issues facing investors and financial advisers alike is the inconsistent reporting of factors across different managers, products and even indices, suggests Tang. Factor assessment and analysis was a key part of his role in analysing managers within Zenith’s research team, and similarly so since his move into consulting, where he partners with multiple advisory firms to build tailored solutions.
While everyone is essentially seeking the same type of business, that is, one that is growing earnings, doing so sustainably and trading on a reasonable valuation, there are very different ways to get there, and no commonality on measuring said criteria.
Factor investing can be broken down into just four key factors that drive equity market returns, being Value, Earnings Momentum, Price Momentum and Quality.
Harnessing these factors is key to the success of the approach, as well as ensuring each factor has an ‘economic rationale’ to back it up. Value investing is the perfect example, despite its recent underperformance, with most investors about to rationalise the concept of ‘buying cheap assets’.
The podcast is available now and can be accessed here.
