Factor Investing : The Road Ahead
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
"The biggest risk of all is not taking one." - Mellody Hobson
The chart below depicts the global Google Search Trend for the word “Factor Investing” over the period January 2004 to January 2022. As visible, the interest towards factor investing over time has increased exponentially over the last couple of decades.
Source : Bloomberg
This chart depicts the growth in the NAVs of S&P’s factor based indices vis-a-vis that of the S&P 500 Index over the period 4th July 1995 to 30th November 2023. All the NAVs are in USD and have not been converted to INR. All the indices have been scaled to 1,000 as of 5th July 1995.
Past performance may or may not be sustained in future and is not an indication of future return.
In a 2019 survey conducted by FTSE Russell to assess the prevalence of smart beta and factor-based strategies among 178 asset managers across various AUM tiers and regions, some compelling trends emerged. The findings revealed that over 58% of the respondents had already incorporated smart beta strategies into their portfolios. Furthermore, among those who were still in the evaluation phase of such strategies, more than half expressed their intentions to include them in their portfolios within the next 18 months.
What's particularly intriguing is the remarkable growth in the adoption of multi-factor smart beta strategies. In 2019, a significant 71% of managers were utilising multi-factor strategies, a substantial increase from the 49% recorded in 2018. This underscores the increasing popularity and effectiveness of multi-factor approaches in the investment landscape.
It's also noteworthy that the majority of surveyed respondents, over 60%, had embraced smart beta strategies for long-term strategic allocations. Only a small 7% of asset managers reported using smart beta primarily for short-term tactical purposes, emphasising the enduring and strategic nature of these investment approaches (FTSE Russell, 2019).
Factor investing has been on a steady rise across the global investment landscape, and its future looks particularly promising in India. As this investment approach gains traction in the Indian market, NJ Asset Management has been stepping up to meet the challenge with innovative solutions and a forward-looking perspective.
One of the key hurdles to factor investing in India has been the scarcity of accessible factor-based strategies. Investors have faced a relative lack of choices, making it challenging to incorporate these strategies into their portfolios. Additionally, the dearth of comprehensive, high-quality data — both in terms of historical records and coverage of a wide range of companies — has posed a significant constraint.
NJ Asset Management, recognizing the potential of factor investing, has made significant strides in addressing these challenges. Over the past few years, the company has diligently curated a high-quality dataset, spanning more than two decades, covering a substantial number of companies. This extensive database now serves as the cornerstone of NJ's factor-based strategies across its products, offering a reliable and robust foundation to build our portfolios upon.
Furthermore, NJ Asset Management boasts in-house data analytics capabilities, allowing for a deeper and more insightful exploration of the data. This synergy between comprehensive data and data analytics empowers NJ to craft and manage factor-based strategies that align with their clients' investment goals and risk profiles.
The future of factor investing in India is not only about expanding accessibility and data but also about innovation. NJ Asset Management is committed to pioneering rule-based strategies that adapt to the ever-evolving market dynamics. With computing power, data analytics, and evidence-based intelligence reshaping the investment landscape, NJ is at the forefront of this transformation.
One area where NJ envisions significant progress is in the development of protocols that can assign weights to individual factors based on real-time market conditions. This dynamic approach promises to make factor investing even more efficient and effective. It's a crucial step towards fully adaptive protocols that leverage data-driven machine learning technologies. These adaptive protocols aim to offer investors a superior investment experience, unlocking the potential of factor-based investing for a broader audience.
The acceptance of factor-based strategies in India is poised to grow, with an increasing array of investment options and innovative strategies entering the market. NJ Asset Management, as the first exclusively dedicated rule-based asset manager in India, is determined to lead this endeavour. The adoption of factor-based strategies marks a shift in the investment landscape, providing an alternative to the traditional, discretionary approaches. This change is essential in eliminating human biases and ensuring time-bound rebalancing, offering investors a markedly different investment experience.
Furthermore, the mutual fund industry in India is at a nascent stage compared to the potential it holds. With the economy maturing and structural reductions in inflation rates, the preference for fixed-rate savings is expected to wane. This shift in financial behaviour is anticipated to drive the growth of professional asset management in the coming decades.
In conclusion, NJ Asset Management believes that factor-based strategies are set to become an integral part of the Indian investment landscape. These strategies, with their potential to generate positive excess returns in a cost-effective manner, coupled with ongoing research efforts to enhance the consistency of factor performance, will inevitably find their place in the portfolios of Indian investors, shaping the future of factor investing in the country. NJ Asset Management is poised to lead this change, ensuring that investors have access to innovative and adaptive strategies that can navigate the complexities of the evolving investment landscape.