At Cafemutual Confluence Investment Marathon 2021 (CCIM21) Vinay Paharia, CIO, Union MF touched upon the key factors that can enhance investment portfolio to deliver superior returns.
Growth factor
Companies with faster growth deliver higher returns vis a vis companies with slower growth. As against, past growth, future growth has a much stronger influence on future returns. Let’s delve into this numerically.
We can divide the available universe of companies into parts i.e. portfolio A where companies have grown at a faster space and portfolio B where the growth has been slower. Analysis solely based on past growth rates (retrospective growth study) reveals that the outperformance of portfolio A over B is not that meaningful.
On the other hand, creating portfolio A with companies expected to grow faster in the next three years and portfolio B with companies depicting a slower growth rate (prospective growth study) shows a material outperformance of A over B.
Quality factor
A company having a better return on capital is referred to as a good quality company while poor quality companies have a weaker return on capital. As against past quality, future quality has a stronger influence on future returns and are likely to produce superior returns. This can be observed in a similar retrospective and prospective study.
Retrospective quality study
Prospective quality study
Value factor
A retrospective and prospective study show forward-looking valuations have a stronger influence on future returns than trailing valuations.
Retrospective value study
Prospective value study
Momentum factor
Momentum simply means a company’s whose share price has done well in the past will do better in the future as well. The momentum study illustrated below indicates momentum has worked in India and has helped outperform 7 out of 10 times in the past decade.
Conclusion
All four factors have proved that factor premium exists in India with the highest premium for growth, followed by quality and value based on prospective data whereas momentum has delivered the best performance based on retrospective data.
* OP = Outperformance of above average over below average portfolio across time periods.
Prospective data includes fundamental analysis and human intervention while retrospective data relies purely on historical data analysis. Hence, fundamental research with forecasting should be blended with quantitative factors to deliver superior results. Thus, a Quantamental approach (quantitative + fundamental) should deliver superior performance over time.
Watch this video to understand each of these factors in detail.
