Factor investing is likely to become a major part of the asset management industry in the years ahead, according the chief investment officer of Canaccord Genuity Wealth Management.
Factor investing is a part passive, part active approach to investment management. It involves using certain pre-determined criteria to screen investments, which is the active element, and then investing in all of the assets that fit that criteria, which is the passive element.
Michel Perera said: "The factor approach has become popular, because indices constructed using factors such as value, size, volatility, quality or momentum have all outperformed traditional equity indices over the long term.
"The underperformance of value as a style is as pronounced as it has ever been. It could be that 2020 is a year where value leads the way, but committing too much to it may be foolhardy."
The value style of investing has been deeply out of favour with investors for most of the past decade, as the style tends to perform best when interest rates are higher than they are now and when bond yields are rising.
The value style of investing means a fund manager pays most attention to the valuation at which a company trades relative to its peer group or its own history, while the growth style of investing involves a fund manager prioritising the rate of growth of a company's earnings.
Traditionally, when interest rates are low, this is because the rate of economic growth in an economy is low and policy makers want to keep borrowing and debt repayment costs low so as to enable individuals to spend more, as a way to stimulate economic growth. With weak economic growth, investors prioritise the level of earnings growth being achieved.
Mr Perera said: “Interest rates in the UK and globally are near extreme lows for a number of reasons: technological advances; the reduction in trade union power limiting wage increases; ageing populations mean more pensioners and the most common way to generate income for a pension is through purchasing bonds.
"The upside risks are related to the new political landscape post-Brexit and Trump. If politics becomes more fragmented in the next year, it’s possible we could see socialist policies, which could drive interest rates higher.”
david.thorpe@ft.com
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