Factor investing series

The future is Factor Investing

| 18 September 2019

‘The Future is Factor Investing’ was the theme for the inaugural Satrix conference, hosted in Cape Town and Johannesburg last week. This event focused on factor investing as a solution to optimising outcomes in an increasingly challenging investment environment.

Helena Conradie, CEO of Satrix opened the occasion with a fitting US Open tennis analogy, “Even if you have all the luck in the world, if you face a Federer, Djokovic or Nadal, luck won’t help you; only skill will. Our world is a different ballgame. There are only a few factors you can control. It’s a combination of skill and luck… We need to scrutinise our portfolios’ exposure to factors and increase the portion that can be explained by skill and not luck.”

Duma Mxenge, Satrix’s Business Development Manager, added some insightful questions to the day as MC. He introduced an impressive line-up of speakers including Fintech entrepreneur Simon Dingle, former FNB CEO Michael Jordaan, and author and journalist Richard Poplak. Given the current global market volatility, speakers focused on the future, looking at emerging trends in the Fintech and investing space, with an emphasis on innovation and making a positive impact on the world.

Away from the centre – predominant trends in financial technology

Simon Dingle opened with a story of rivalry-turned-respect. In 2003, Microsoft launched its ‘Get the Fact’ campaign to purposefully spread misinformation about Linux – an open-source operating system creating a collaborative community of coders. First, Linux was ‘laughed at’ and not perceived as a threat. Then its software proliferated into different niches, gaining credibility and Microsoft woke up and got worried.

Microsoft’s campaign didn’t work. But Linux also didn’t win the way it thought it would. Windows has remained the dominant desktop software, while Linux has become the base of today’s Android and iOS operating systems. And it’s also the kernel off which Windows 10 runs. Windows went from being Linux’s biggest competitor to being one of the biggest global spenders on opensource on the planet. And that, said Dingle, is how innovation goes. “They ignore you. They laugh at you. They fight you. You win. Sometimes.”

Dingle added that today’s tech trends that interest him the most are the ones being laughed at, fought or ignored. He touched on Bitcoin and cryptocurrency, and the evolution of machine learning and Google. He emphasised that a key difference is the switch in the flow of information. Whereas before we went out looking for information, information now ‘looks’ for us, he says. And we need to find a way of embracing this turn of events.

Simon Dingle in conversation with Michael Jordaan

Dingle asked well-known former bank turned entrepreneur Jordaan a series of crowdsourced questions from the audience. Some insights that emerged included the fact that Jordaan’s new Bank Zero is being built on opensource software, at just 1% of the cost of a traditional bank. Additionally, Jordaan is an investor in ‘crypto’ and believes it has an important role to play. Ebucks was, in fact, conceptualised as the first e-currency before it ran into Reserve Bank problems and became the loyalty programme we know today. So, he’s predisposed to crypto, but like any responsible investor, he has ensured his portfolio is spread across a variety of cryptocurrencies, not knowing which one will ultimately be the winner.

He believes the adoption of blockchain could put the financial institutions that extract the most in fees at risk, “Electronic transactions should cost the same as Google searches…” And that cybercrime is “the single biggest risk we face”.

He also believes start-ups are the future. “We’re searching for an appropriate capital model that goes beyond profit…” We must look more broadly, to find the best vehicle to achieve social good and solve real challenges. “Start-ups that do so are more effective than government and big business.”

The next generation of factor investing

Money is in motion, said Peter Weidner, Head of Factor Solutions at Wells Fargo. Referencing a FTSE Russell Smart Beta survey, he said factor investing’s adoption has nearly doubled in three years, and the benefits of smart beta are being perceived as multi-dimensional. Additionally, research shows that over the last 50 years, those who invested in factors would have experienced better performance.

How do we know this success will continue in the future? Weidner says three things drive returns and successful investors will take advantage of these:

  • Behavioural biases. The momentum factor can exploit biases like herding behaviour (e.g. our propensity to buy in the highs and sell in the lows).
  • Structural constraints. For example, the low volatility factor. People often buy high beta, high risk stocks, which means lower volatility stocks are less loved, which gives investors the opportunity to harness the potential offered by these stocks and generate better returns in their portfolios.
  • Risk compensation. A factor approach lends itself to investing in a broadly diversified portfolio of smaller and riskier stocks to efficiently exploit this foundational principle in finance.


Does factor investing really work?

Kingsley Williams, CIO for Satrix, showed that it has added value over time, outperforming the market and inflation. Performing a live demonstration of the newly launched Satrix Factor Tool, Williams shows how portfolio construction can be revolutionised and made extremely transparent. He showed the magic of blending – combining funds that should intrinsically behave differently – and demonstrated how the tool can reveal what’s driving the strategies of different unit trusts and whether these are being managed according to what they say on the box.

Williams additionally delved into the Satrix SmartCoreTM Index Fund, which was launched earlier this year as an SA General Equity fund based on a factor investing methodology. The proprietary SmartCoreTM index drives returns through enhanced exposure to the factors of momentum, quality and value.


Richard Poplak

Daily Maverick editor-at-large Richard Poplak said that, despite the depth of the issues in this country, South Africans have powerful ‘assets’ on their side in the fight against corruption and crime. “Firstly, we have an extremely strong NGO sector that can speak and act on behalf of its citizens. In Sandton, just last week, 20 to 25 civil societies shut down Sandton in support of the fight against gender-related violence. Our NGOs are a powerful weapon in the fight against crime and corruption.”

Additionally, he said our country’s freedom of press and speech remain intact. “But quality journalism needs the support of business and civil society. “The fight back in this country begins with us. We need to support our employees if they want to protest and we need to support a free press.”

He said other countries also have deep issues and urged the audience to stay and ‘fix your own home’.

Click below to view images from the Cape Town and Johannesburg event.

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