A reflection on the rise of factor-based strategies
Many enthusiastic investors look forward to this time of year – be it with excitement or trepidation – so they can reflect on how their funds stacked up on performance-ranking tables over the prior year. The sterile obsession around 12 month performance notwithstanding, calendar years are neatly packaged time periods to look back on everything that went well, and everything that didn’t. Was my fund exposed to Steinhoff? Did I have enough Naspers? Was my portfolio hedged against the Rand? And ultimately… did I pick the right fund manager(s) to make those all-important calls and judiciously adjust my portfolio through the year to best take advantage of volatile markets?
Looking at the top of the General Equity category of unit trusts’ performance table, it appears all these questions are, sadly, irrelevant.
Because the top performing equity funds last year were completely dominated by funds that are systematically run, i.e. their positioning is not determined by a traditional fund manager making fundamental calls, but rather by a disciplined rules-based approach selecting stocks to buy and sell based on a measurable investment characteristic. This approach is known as factor investing, which embeds the same characteristics that active managers employ in their investment process through well-known strategies such as Value, Momentum, Quality or Size, but are implemented in a passive or rules-based approach. Importantly, our fundamental view is that these factors are fairly precise and intuitive drivers of risk and return in portfolios. Investors will ultimately benefit by viewing their portfolio through a holistic ‘factor lens’, and making investment decisions based on this approach.