Investing with the X factor in global stocks

The multi-factor strategies of Rosenberg Equities offer a diversified and sustainable exposure to global equity markets in a cost-effective manner.

In a nutshell, Rosenberg Equities, the specialist in quantitative share management of AXA IM with EUR 19 billion in its portfolio, offers two multi-factor strategies: Sustainable Equity and Multi-Factor. The core of the Sustainable Equity strategy consists of the factors low volatility and quality. The combination of these factors has the objective of protecting capital in declining markets and yielding returns in bull markets in order to perform stably under all market conditions. The Multi-Factor strategy is, with the quality, value and momentum factors, meant to do better than the market under almost all conditions.

The investment process at Rosenberg Equities is based on a detailed analysis of the key data of 20,000 businesses worldwide. Advanced technologies, e.g. neural networks, big data and artificial intelligence, are used. As a consequence of this quantitative approach decisions are reached objectively and rationally. The use of factors results in improved risk-return ratios, says Gideon Smith, Europe Chief Investment Officer at Rosenberg Equities. “To me, factor investing is fundamental investing with a different label. For instance, with the value factor we mostly look at the level of future income of a business. With quality we pay attention to the sustainability of future income streams. Low volatility regards the risks that are associated with income streams. With momentum the focus is placed on the profit growth of a business.”

Risk control

When composing the portfolios, Rosenberg Equities pays attention to, apart from turnover, transaction costs and liquidity, the unexpected risks that factor investing may bring about. Continuous monitoring and risk control form an integral part of the approach, says Smith. The quantitative model weighs factors dynamically, conditional upon the market conditions. Because sometimes momentum has the X factor, and then quality again. “We want positive exposure to factors that we deem to be relevant, but the weighting changes continuously, for instance if valuations rose too rapidly due to speculation, as in recent years in case of low volatility. We try to identify these risks and control them in such manner that we are exposed to volatility as little as possible. In addition, we keep a very close eye on the mutual correlations between factors.”

The result is a portfolio that aims for a potentially sustainable long-term return of which the volatility is lower than that of a share index. Factor investing thrives in the long term but Smith does indeed realise that nowadays investors easily run out of patience. “Everyone refers to himself as a long-term investor but everyone wants to know why the return was disappointing last week. With the help of factors a stable portfolio can be composed that should do well under most market conditions. There will be periods when factors fall out of grace. But because the bulk of the return originates from the exposure to factors we can properly explain a potential underperformance”, says Smith.

The factor strategies of Rosenberg Equities rely on ESG criteria. Smith does not consider sustainability as a factor but as a resource to reduce the risks in the long term and to improve factors. “We look at sustainability in a basic manner. ESG provides economic information about a business, and consequently says something about the potential of quality, value or momentum. Diversity, part of the S of ESG, is an indicator of the quality of a business. If the top of a business has been diversified then better decisions are reached that shall result in more stable profits. With quality we also pay attention to the CO2 footprint of a business. The higher this is the bigger the chance that the business is burdened with additional costs in the future.”

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