FINANCIAL PLANNING
FACTOR INVESTING
includes stocks with lower-than average volatility.
Momentum cho0ses stocks with stronger past
performance while Alpha picks stocks with most
outperformance over its Universe index in the past.
Performance of Factors in various regimes
Market Cycles - Quality and low volatility factors
tend to perform wellduring bear phases and
are inclined to offer downside risk protection.
Conversely, Value tends to gain the highest exXcess
returns when the market recovers from troughs.
In bullish markets, Momentum tends to clock the
better performance among factors.
Business Cycles - Historically, the value, dividend,
and size factors have shown strong procyclical
By: Shally Gang behavior, typically outperforming the benchmark
Head-Products, Tata Asset Management during periods of economic expansion, and
underperforming during contractions. On the other
Origin of Factor investing hand, low volatility, quality, and momentum factors
Insearch for 'what drives the risk and return of a have generally outperformed the benchmark in
stock' or in what manner can a stock's return be both phases of the business cycle, with a greater
explained, various factors were discovered. Base tendency to do so during economic downturns
was formed from the thought that every stock has (Source: S&P Dow Jones Indices).
some level of sensitivity to the movement of the Quantum of performance of Factors and % of time
broader market, which is measured as Beta. Later spent in UP and DOWN markets
academics and practitioners discovered factors
and exp0sures that drives returns of stocks, aside Quality and Low Volatility factors tend to be
of market exposure or Beta - smart betas like more defensive, providing protection in the
valuation of a company, size of a company, Growth down market months, rather outperforming
itsown Universe index during down market
of a company, low volatility, Quality, Dividend periods. Quality and LowVolatility tend to show
Yield. Only those parameters that influence return
reduced return volatility, run a higher risk
persistently over time, across sectors, geographies
Momentum and adjusted return and lower drawdown than the
and have an economic rationale. benchmark indices.
Alpha factors came in later. Availability of high
quality corporate data spanning more than three Value tends to exhibit strong procyclical
Factor
market cycles seems to be an enabler for characteristics and tends to outperform during
investing. up-market phases, but it tends to be prone
How are various factors measured to larger losses during down-market periods.
Value portfolio tends to have a beta,significantly
Value factor considers stocks with low prices greater than one compared to the Benchmark
relative totheir fundamental value, Quality picks and as compared to [Link]
Stocks with lower debt, good quality of earnings and portfolios tend to run a lower risk-adjusted
return than the Benchmark index.
high RoE (Return on equity), Low Volatility factor
INVESTORS INDIA |MAY-2025 25
FINANCIAL PLANNING
Momentum tends to have a higher risk-adjusted Disclaimer: The views expressed in this article are
return and tends to outperform its own Universe personal in nature and in is noway trying to predict
in bullmarket phases. Momentum tends to the marketsor to time them. The views expressed
undergo a higher drawdown inthe bear market are for information purposes only and do not
phases than Quality - CY2008, 2011, 2018 and construe to be any investment, legal or taxation
at time it undergoes higher drawdown than advice. Any action taken by youon the basis of the
its Universe index too like in 2008 and 2018. information contained herein is your responsibility
Momentum portfoliotends to have a higher alone and Tata Asset Management Pvt. Ltd. will
allocation to cyclical sectors and a tends to have not be liable in any manner for the consequences
a higher beta in the Indian market of such action taken by you. Please consult your
Mutual Fund Distributor before investing. The viewS
Factor exposure in Portfolio
expressed in this article may not reflect in the
Factors are just another route to investing. If scheme portfolios of Tata Mutual Fund. The view
one believes that the journey of market is laid expressedare based on the current market scenario
out with all kinds of market phases, while being and the same is subject to change. There are no
linear upwards in the very long run, factors can guaranteed or assured returns under any of the
be beneficial. Say, Momentum factor can capture scheme of Tata mutual Fund
outperformance during up-market phases and Mutual Fund investments are subject to market
Quality factor can capture outperformance during risks, read all scheme-related documents
down-market phases. carefully.
26 INVESTORS INDIA | MAY-2025
