Factor investing - a smoother road to excess returns

To provide investors with the best possible return on the equity component of its multi-asset funds, Satrix is making a change to the Satrix Low Equity Balanced Index Fund. It announced it is switching strategies on the fund’s 15% domestic equity allocation from tracking the FTSE/JSE Capped SWIX Index to tracking the Satrix SmartCore™ Index.

The Satrix SmartCore™ Index is a factor investing approach that targets stocks with desirable attributes such as Momentum, Value and Quality.

Kingsley Williams, chief investment officer at Satrix, says SmartCore™ is Satrix’s ‘best investment view’. “The way the strategy is constructed is an ideal fit for investors who want equity exposure over the long term and who are looking for excess returns relative to the broad market. The decision to shift strategy for the 15% domestic equity allocation of the low equity balanced fund means investors in this fund can also partake in the excess returns that SmartCore™ aims to deliver.”

Williams says factor investing is much like buying a house, where the decision to buy is based on far more than price. “When buying a property, you don’t look at a list of houses in an area and choose the cheapest – you consider a range of other factors too. For instance, you look at the quality of the property. Is it well built, and does it have good fixtures and fittings? You may also look at the area and whether the properties in the area are growing in value. This is known as momentum, which means your property value is more likely to increase.”

In value investing, stocks are bought on price, but this strategy ignores the other core factors that drive excess returns, such as the quality and momentum of the stock.

Williams explains that SmartCore™ has outperformed the median of funds in the South African Equity General category, as well as the Capped SWIX, on a rolling three-year basis with a high degree of consistency. “In fact, SmartCore™ outperformed the Capped SWIX 86.2% of the time on a rolling three-year annualised excess returns basis.”

He concluded that SmartCore™ delivers a much smoother ride to excess returns, with lower volatility than the Capped SWIX on a one-, three-, five- and 10-year basis. “We are excited to introduce this performance to the Satrix Low Equity Balanced Index Fund, which aligns the domestic equity strategy with our successful Satrix Balanced Index Fund”.