EVOLVING STRATEGIES
There are many other strategies that have evolved in recent times to capture trends as well as new developments. Some of these are yet to pass the test of time
QUANT INVESTING: Quant investing is the use of data and quantitative models to arrive at a computer-screening process to select stocks based on a model that has worked based on past data. These are generally back-tested on available market and stock data, and are purely datadriven. Quant models could be a mix of value, growth or momentum filters to pick stocks. As economic and market information changes with time and what worked in the past may not necessarily work in the future, this strategy has its share of risks.
Where quant investing helps most is to take the emotions out of investing. The success of quant investing is as good as the model it follows and the filters it has set based on past market information. These models are good for institutions that wish to take advantage of models that have been rigorously back-tested and may demonstrate the possibility to work in the future. These are also good to arrive at a universe of stocks based on the models developed to then use the human experience to make the final investment decision.
ESG INVESTING: Environmental, social and governance (ESG) investing is all about choosing investments based on sustainability, commitment to furthering social causes and good corporate governance. There are factors that have social responsibility also thrown in by certain models that follow ESG investing. Basically, one invests in only companies that have an ESG model in place.
Such investments are mostly a choice that individual investors may have, even at the expense of losing out on growth through other models. It could be treated as following an ethical form of investing. For instance, one may not wish to invest in companies that are in the business of tobacco or alcohol or of impacting the environment.
CONTRARIAN: Investors following this strategy assume the market is usually wrong at both its extreme lows and highs, selling into rallies and buying when markets tumble. So, when the markets are going up, this strategy takes a pessimistic view and bets against it and when the markets are down, investments are optimistic. Contrarian views set in based on news and events.
For instance, when the Maggi controversy dented the share price of Nestle, a contrarian investor would bet on the company. This strategy doesn’t look at stocks that are trading cheap; it looks for valuation dips because of market reaction to negative events. It is a risky strategy and something that one should consider only if they can take risks or are highly convinced about the veracity of the news.
An active investing style is one where investment managers select specific stocks and try to time the market to seek better returns for investors. Actively managed funds typically charge higher fees than passively managed funds. So, if you are comfortable with more investment risk and have a long time until you need to use the invested money, active investing may be for you.
In contrast, passive
investing is all about invest and forget. Diversified portfolios can be created and left for a longer time to ride the market. Passive investing, especially through ETFs, costs less compared to active investing and justifies a role in a portfolio for long-term investing. Moreover, if you have less comfort with investment risk, passive investing may be for you.