Factor Investing EN

Factor Investing

A new approach to portfolio management

Behavioural biases and investment

Behavioural biases can have a major impact on the way in which certain investors, both institutional and private, make decisions. For example, by preferring everything familiar or by ignoring the relevance of the analysis of fundamentals and delaying taking new information into account. For this reason we offer an alternative approach.

Denis Panel – Chief Executive Officer of THEAM, a subsidiary of BNP Paribas Asset Management

Whether we like it or not, our decisions often include an element of irrationality. This is a result of the major role of emotions in the way in which we view our environment and assess various possible scenarios. However, this emotional decision-making process – which certain would describe as intuitive – may also lead us to make mistakes in certain situations by taking us further away from pure logic.

Cognitive sciences have focused on this phenomenon and have identified certain of our characteristic reactions, which draw us away from ‘rational’ logic: cognitive biases.

The existence of these biases has a direct influence on the way in which we think and make choices. This is particularly true when we make investment decisions.

<img alt="How cognitive biases can impact your investment decisions?" src="https://bnp-ip-front-res-pad.brainsonic.com/ressources/media/photo-54520-how-cognitive-biases-can-impact-your-investment-decisionso.jpg" /><br /> <h2>How cognitive biases can impact your investment decisions?</h2> <p>

Factors, towards a more rational investment approach

<img alt="Smart Beta and Factor Investing: toward a more rational approach to investing" src="https://bnp-ip-front-res-pad.brainsonic.com/ressources/media/photo-54564-smart-beta-and-factor-investing-toward-a-more-rational-approach-to-investing.jpg" /><br /> <h2>Smart Beta and Factor Investing: toward a more rational approach to investing</h2> <p>

To overcome these biases, purely systematic management approaches have been developed. They are based on the use of quantitative models which allow portfolios to be built by stock picking according to different factors. These factors correspond to criteria, such as volatility or financial data, which assist in stock picking and for which academic research has proven that they offer a better risk-return profile than traditional indices. This is called factor investing.

These factors belong to the major “investment styles” of discretionary managers, but the use of a systematic methodology enables firstly to remove the element of subjectivity inherent in human analysis and secondly to deal with the investment universes of several hundreds, if not thousands, of stocks in an efficient and uniform manner.

Finally, the four factors that we have chosen to use are related to explicable concepts, which can be justified by economic and complementary reasoning: Quality, Value, Low-Risk, Momentum.

Factor investing: a new portfolio management approach

Smart beta, and factor investing in particular, positions itself at the cross-roads between three major kinds of management:

  • Indexed management for the use of pre-defined and transparent construction rules
  • Discretionary management, by seeking long-term performance drivers and factors that are justified by economic logic
  • And quantitative management, for the use of quantitative techniques, which offer several advantages:
    • Objectivity in investment decisions,
    • The possibility to historically assess the behaviour of factors,
    • The ability to trade in large investment universes,
    • And the possibility to finely calibrate risk.

This approach is increasingly appealing to investors, as it offers efficient, transparent and systematic exposure to factors which drive market performance.

Factor investing: a new  portfolio management approach

Our factor-based strategies

Low Volatility

The Low volatility approach focuses on a single factor – the Low Volatility factor – for its stock selection. This factor relates to the counter intuitive finding that risk is not adequately compensated for in equity markets, and that choosing less risky stocks tends to offer an better return-to-risk ratio over the long term. This strategy aims to reduce the volatility (or risk) of the portfolio and limit the impact of market corrections while also enabling investors to benefit largely from the periods of rising markets.

Guru ™

The Guru ™ strategy can be defined as a high-conviction fundamental approach, based on three factors : Quality, Value and Momentum. This investment methodology was inspired by techniques that have been used by famous asset managers for nearly a century (Benjamin Graham, Warren Buffet, Peter Lynch ), hence the name GURU ™. The stock selection follows a so-called best-in-class methodology, which consists in ranking stocks according to the 3 factors and selecting the those with the best overall scoring.

DEFI

The DEFI (Diversified Equity Factor Investing) strategy is a multi-factor smart beta strategy that provides a diversified exposure to 4 key equity factors: Value, Quality, Momentum and Low Volatility. The specificity of this approach is to offer a balanced exposure to the factors by maintaining an equal risk on each of the 4 factors and to allow a precise control of the portfolio’s main risk parameters – beta and tracking error.

Our funds on factor investing

THE FUNDS QUOTED SHOW OUR GLOBAL CAPABILITIES AND IS FOR INFORMATION PURPOSES ONLY. THIS DOES NOT CONSTITUTE AN OFFER TO BUY NOR A SOLICITATION TO SELL ANY OF THE FUNDS REFERENCED.

Some of the referenced funds are not authorised for sale in all jurisdictions. Investors should ensure that they are fully informed about the funds, sub-funds, classes and sub-classes of shares or units that are authorised to be marketed in their country of residence and the restrictions that apply in each of these countries.

ETFs Smart Beta

THE FUNDS QUOTED SHOW OUR GLOBAL CAPABILITIES AND IS FOR INFORMATION PURPOSES ONLY. THIS DOES NOT CONSTITUTE AN OFFER TO BUY NOR A SOLICITATION TO SELL ANY OF THE FUNDS REFERENCED.

Some of the referenced funds are not authorised for sale in all jurisdictions. Investors should ensure that they are fully informed about the funds, sub-funds, classes and sub-classes of shares or units that are authorised to be marketed in their country of residence and the restrictions that apply in each of these countries.

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