Sunday Brunch: it's a question of character(istics)

The world of investing and sustainability can challenge our traditional ways of looking at the world and characterising and grouping things.

When my children were younger we were fortunate to live in the countryside. Our back garden was a mixture of traditional and 'the wild' - the latter a function of us living in a wooded area in Kent that was devastated by the October 1987 hurricane that took some by surprise.

One significant responsibility I had was preparing for the Easter Sunday 'egg hunt' which actually involved hiding (but still discoverable) chocolates of various shapes, sizes and tastes around the garden.

I remember fondly how, once found, the kids would sort their spoils by size so that each of them had broadly the same volume of chocolate. However, sometimes they would sort by wrapper colour and sometimes by animal/character shape - the equality characterised in a different way.

We have historically grouped things in certain ways. At school we are used to playing sports according to the year group that we are in. As someone with a June birthday (and hence young in my year) this was often a detriment. But it doesn't have to be that way. We could select based along a different characteristic to age. They do just that in Australia moving players between age groups based on height and weight factors which creates inclusion and may allow for the development of skills without the fear of getting trampled (pun intended) by purely size during those early years.

The world of investing and sustainability can challenge our traditional ways of looking at the world and characterising and grouping things.

Let's look at that...

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The X-Factor

One of my roles at Morgan Stanley was in a team called Systematic Advisory Services. My team's aim was to 'better monetise the firm's quantitative assets in helping a broader range of our clients'. That involved providing quantitative hedge funds with a broader sales service and helping them understand how the fundamental world thought about things; and helping fundamental investors understand the world of quant, data and factors.

Factors. The mythical data science-y things that drove complex models to outwit mere mortal investors. What are they?

They are just chocolates organised by colour rather than size, rugby players organised by size and weight rather than just age. They are just a different way of characterising stocks.

In fact traditional, fundamental investors have always used factor investing, it's just that those factors were 'geography' or 'industry' rather than 'value' or 'growth'. Factor investing postulates that all stocks sharing certain characteristics will move in the same way.

You may choose to invest in Taiwanese (geography) Tech (industry) stocks because you think that sector will benefit from increased demand for memory chips (of course there may be some differences between companies, but the overall group will benefit).

You may alternatively think that the market environment is good for those stocks that are already outperforming or have good momentum, regardless of what geography or industry they are in.