Watch this video* on factor investing – the systematic search for sources of alpha returns using well-documented properties of an asset class known to play a part in investment performance.
WATCH THE VIDEO* ON MULTI-FACTOR STRATEGIES
As the video* explains, factor investing involves style factors such as value, quality, momentum or low risk (volatility).
The factors are used to select securities and tilt investment portfolios in favour of cheaper (value), outperforming (momentum) stocks or corporate bonds from the most profitable and better managed (quality), less risky companies (low risk).
Putting together a factor-based portfolio can be challenging. There is more to stock and bond returns than just style factors. Making sure other factors do not interfere can make all the difference. Factors can be grouped into two sets:
- These factors explain differences in the returns of stocks and corporate bonds
- market factor, sector, region and size for stocks
- duration, risk premium, sector, currency and size for corporate bonds.
- These style factors tend to predict future differences in returns
- value, quality, low risk and momentum.
Factor investing can be combined with an approach that integrates environmental, social and governance (ESG) criteria. Incorporating sustainability and climate change criteria can help identify and limit reputational, operational and financial risks.
This is true not just in the case of factor investing; an ESG approach can be applied to all investment processes. At BNPP AM, we implement this across the board.
*For professional investors
Webcast with investment specialist, Charles Cresteil, and head of fixed income research Quant Research Group, Zine Amghar (3/3)
White paper: Factor Investing in Equities and Corporate Bonds – Neutralising Bias Factor Investing: Neutralising Bias by Raul Leote de Carvalho, deputy head Quant Research Group
More articles by Raul Leote de Carvalho
Practical Guide to Multi-factor Investing
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.