Factor investing is one of the alternative investment strategies that asset managers are looking at to diversify their offering, said a senior official of S&P Dow Jones Indices.
Simply put, factor investing refers to an approach that targets stock characteristics that drive the difference in expected returns over the long term, said Koel Ghosh, Head-South Asia, S&P Dow Jones Indices and CEO, Asia Index Pvt Ltd.
She said some of the common factors that have been well documented in academic literature and adopted by the investment industry include low volatility, momentum quality, and value.
According to Ghosh, factor indices do not replace market-cap-weighted indices. Factor indices look to capture targeted risk premia following a rules-based and transparent index methodology.
Ghosh said while single-factor smart beta strategies tend to outperform the market over the long term, they also experience periods of underperformance at different macroeconomic conditions, depending on their cyclical characteristics.
Hence, blending factors in a portfolio to diversify factor exposure may help deliver smoother excess return across business and market cycles, she added.