3 key factors every investor can use to their advantage
The term ‘factor investing’ might sound like the latest investment trend, but it’s been around for decades. In fact, it’s typically been the domain of active investment managers and it’s not as complicated as it might sound.
“Factor investing is really around seeking to identify particular characteristics within a universe of securities that exhibit certain qualities,” says Tamara Haban-Beer Stats, Director and ETF/Index Investments Specialist for BlackRock Australia.
Think a fund of investments just identified on the basis of quality, or investments that only meet certain value criteria. Or alternatively, an investment purely made up of companies that are currently experiencing strong price momentum.
You choose a characteristic, and your investments are filtered based on this. A comparison is what happens when you head to a travel site to book a holiday.
“You can choose anything online from hotel star rating, to proximity to the beach or proximity to the city, reviews, there are all sorts of characteristics you can filter and make your choice on. That’s actually quite similar to factor investing. It’s really around identifying characteristics that filter out a specific group of stocks,” says Haban-Beer Stats.
BlackRock focuses on three factors:
- Quality: exposure to companies with strong balance sheets as measured by profitability metrics, leverage ratios and earnings stability.
- Value: identifying companies that are undervalued compared to their peer group using metrics such as price-to-book, price-to-earnings and enterprise-value-to-cashflows.
- Momentum: companies that are experiencing strong price momentum considering price movements over a six- and 12-month period.
In this Fund in Focus, Haban-Beer Stats discusses factor investing and how investors can use it in a portfolio. She also shares more detail on the three factors that BlackRock have selected as their focus.
This interview was filmed on Tuesday 16 April 2024.
Timecodes
- 0:00 - Intro
- 0:21 - What is factor investing?
- 1:57 - BlackRock's three factors
- 3:08 - The case for factor investing
- 3:33 - How factor investing complements sector investing
- 4:17 - Reducing concentration risk
- 4:49 - How investors can incorporate factor investing into a portfolio
- 5:18 - One thing investors should keep in mind when using factor investing
Learn more about iShares Factor ETFs here.
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5 stocks mentioned