By Siddharth Vora
When you’re driving a car and approach a bumpy road, you shift to a lower gear to gain better control. This helps you maintain a slower, more manageable speed, making it easier to handle bumps and obstacles safely.
On the highway, though, you shift into a higher gear for better fuel efficiency at cruising speed. Now, think of your portfolio the same way! Just like the road conditions, market regimes are constantly changing, then why should your portfolio look the same? Why not shift gears with your investments to match the market ahead?
Often in bull markets, momentum stocks tend to outperform, capturing the enthusiasm of investors. In market recoveries, value style tends to do better, as investors hunt for bargains. Conversely, in consolidating or sideways markets, quality style may be more effective, as it provides a safety shelter amidst fluctuating market sentiment. Finally, in bear markets, low-volatility stocks shine, as they offer resilience in challenging conditions.
Each of these styles have different risk-return profiles too, which means a portfolio cannot simply be overweight on one style due to personal biases or short-term trends. For sustainable outperformance across market cycles, one can take a core-satellite approach.
The core portfolio can focus on diversifying and balancing exposure across style groups. Meanwhile, the satellite portfolio must have the ability to tactically increase exposure to the prevailing style regime based on market conditions. This can result in superior risk-adjusted returns.
For instance, when market conditions are favourable and the strategy is return maximisation, investors can focus on styles such as momentum, midcaps and smallcaps. During market recoveries, investors can take exposure to value stocks.
And when market conditions are unfavourable and the strategy shifts to risk minimisation, investors must focus on quality, low-volatility and largecap stocks. This just goes to show that no single investment style can win all the time.
The Basics of Ǫuantitative investing
While quant investing is often confused with passive investing, they are very different. Passive strategies simply replicate a particular index, while in active strategies, investment decisions are made at the discretion of a fund manager. Ǫuant investing refers to systematic strategies that use objective rules and processes to make investment decisions for unbiased and repeatable outcomes.
Every asset management house has a different approach,
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