Factor strategies

We’ve got a sizeable chunk of our equities exposure allocated to Value strategies.

Passive vehicle tilts (e.g ETF’s) are largely chosen for their geographic and regional exposures, like Japan, Europe, and the UK, which are cheap for obvious reasons (war, energy), and to give us unhedged exposure to their underlying currencies (the yen looks very cheap to us).

Actively managed vehicles (e.g fund managers we’ve selected) are largely chosen for their tilts on regular factor loadings (price-book, ROE, eps growth), as well as the above regional and FX exposures.

Firstly, we’ve done this because we think factor dispersion is incredibly high, and the value of Value is very cheap.

We often hold out this graph, which expresses the PE of a basked of growth stocks, against a basket of value stocks, as a ratio, called “spread”. The spread is high, because growth stocks trade at ~2x that of value stocks, relative to their norm of 1.25-1.5x.

Now, value stocks don’t do fantastically well into a downturn. They are better for recoveries, in general.

The graph can be a bit daunting, so that table might be easier to digest.

As such, we are counting on the factor dispersion (staying away from the expensive, long duration rate sensitive stocks) to offset the value-stocks-arn’t-that-great-into-a-downturn effect.

Secondly; we are also overweight Quality Value, meaning stocks that score well of measures of profit, low volatility, as well as that of value. These types of stocks typically do quite well, into a downturn, compared to peers.

So, combining points one and two, we’ve got plenty of Value in the portfolio, which should do well as rates close the gap to very expensive secular growth stocks that thrive in a low-to-zero rate environment, and secondly we’ve got Quality Value, which should hold up better than just plain-old-value into a potentially recessionary environment (predicated on those high rates nose-diving the economy).


Why write any of that?

Well, we want to be clear on what exactly we are trying to achieve, and if the bets are as we intend them.

In our direct equity portfolios, we’ve mostly got insurance stocks, as our primary means of navigating higher rates. Then we’ve got sizeable teleco allocations, given the defensive earnings streams. After that, it’s underweights to consumer discretionary stocks, and IT stocks.

We are quite low beta, which is also a favourable tilt heading into a rates induced slow down.

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