As we approach Christmas each year so does the final of the Simon Cowell produced ‘talent’ show which this year looks like being won by Louisa Johnson who at 17 does appear to possess the requisite ‘talent’ and is 1/6 (odds on) of the remaining four acts to win the final over the weekend of 12/13 December.
The word ‘Factor’ has been prominent in a number of recent emails as the investment industry has discovered a new buzzword or saying to focus on. You may have seen some of the industry output talking about ‘Factor Investing’ but if you haven’t they concern the following factors:-
- Minimum Volatility
- Value (Dividend)
- Small Cap
They argue that by managing the above factors, it is more effective in capturing equity risk premia. Like many of the mainstream asset management industry’s catchphrases or labels they refer to something that should already be built into investors’ processes although momentum is akin to market timing.
At T. Bailey we continue to look at factors to augment our thematic approach to investing. The factors we focus on are referred to as economic factor analysis internally. In addition to the conventional factors, we look through our portfolios to ensure we’re aware of all the factors we’re exposed to, including the less obvious ones.
For example, our non-existent exposure to mining companies is also a pro-US Dollar position as commodities and the US currency are negatively correlated. This is relevant as our investment preferences do not deliver much US Dollar exposure. In order to generate the optimal USD exposure we might hedge into US Dollars or buy a US Dollar share class but having a clear understanding of what your portfolio is exposed to is key to delivering clients’ expected outcomes and completely different to stress-testing your portfolio to previous periods of market turbulence. That’s just one example, there are many more which are important to understand in order to avoid what we and our clients want to avoid – nasty surprises.