Factor investing will expose both passive and active
Factor investing will continue to take-off as investors are disappointed in the returns from both active and passive investment strategies but blended factor strategies may expose investors to risks according to senior HSBC investments executive.
HSBC Global Asset Management, Deputy Chief Investment Officer for Equities, Vis Nayer said factor investing, also known as smart beta, was being readily adopted around the world but said this rapid adoption could lead to contamination in factoring investing strategies.
"In 2009, during the value rally, value factors captured the rise of the market as did momentum factors but as these factors went through the cycle consideration was required as to how they were exposed on the downside and how that could contaminate a factor strategy," Nayer said.
Nayer said factor investing needed to be transparent and investors should able to take any factors, combine them and examine if the returns were explainable by the factors.
"Investors, and asset managers, should not take on one factor it is exposes another area to risk or loss," Nayer said.
According to Nayer factor investing was a democratisation of academic research and had been through its first iteration where it offered equal weight index investments.
He said managers were now working through its second iteration where sources of returns were being examined and separated out to allow managers to blend complimentary factors and eliminate those which created downsides.
Factor investing would continue to grow in popularity and use and was likely to shift investors from pure passive investing as the former provided transparency around outcomes and was not tied to the nature of an index.
"Market cap indices are usually over weighted toward large cap stocks and those with momentum which are not always the best sources of growth but they have been supplied as they provide the most low cost investment solutions."
AUTHOR
Jason Spits
Recommended for you
Retailisation of private markets such as evergreen funds may seem like appealing options for wholesale and retail investors, but providers risk undermining trust if their products are unclear.
Ethical investment manager Australian Ethical has seen its funds under management rise by a third over FY25 to close out the year at $13.9 billion.
BlackRock Australia’s head of intermediary distribution James Waterworth has taken up a new distribution role at an alternative asset manager, while Antipodes has hired a distribution director.
BlackRock’s iShares ETFs have reported a record first half for inflows, gaining US$192 billion in the past six months, to see overall ETF assets under management rise to US$4.7 trillion as it launches its first active ETF in Australia.
