Factor investing helps target diversification and returns

Quantitative factors are as important as fundamental considerations for investors looking to improve their potential risk-adjusted returns, according to AllianceBernstein. 

Research from the global asset manager suggests investor returns do not always lie in conventional ideas of stock selection. 

AllianceBernstein chief market strategist Vadim Zlotnikov said that while the nature of a company’s business, the quality of its management and its ability to perform well in a given business environment were always important, quantitative factors or themes were important too. 

“It’s possible to increase portfolio diversification and potential investment returns by focusing on particular factors when they appear likely to work for or against a company and managing exposure to the stock on that basis,” Zlotnikov said. 

He believes factor investing could be helpful for investors concerned about the risk of crowding, or concentrated exposures, in multi-manager portfolios - the situation he believed was facing the growing number of Australians investing offshore. 

Zlotnikov and his team have identified nine factors they regard as useful in generating excess returns and managing risk exposures. Six of these factors have outperformed the market over various time frames, while the other three factors serve as useful control tools, according to the research. 

“By rotating these factors we can enhance risk-adjusted returns, and the lack of correlation between these portfolios and fundamental research-based strategies gives a very high degree of diversification,” said Zlotnikov.