Factor investing is one of the more important new developments in portfolio construction to have emerged in recent years. It is based on the identification of a number of factors which, when used to construct a basket of stocks, can generate excess returns relative to the overall market.
The global low interest rate environment has fuelled investor interest in a number of strategies and investment styles to exploit alternative sources of (uncorrelated) returns – among them investing in risk factors different to the classical risks such as equity market, inflation/duration and corporate credit risk.
Much has been written on the subject of equity risk premia as the so-called driving forces behind equity price movements. Each risk premium is the result of a factor representing a systematic source of risk. Long-term exposure to such a factor, achievable by investing in the vast array of thematic indices already available to the market, can give an investor outperformance over and above a benchmark.
Iron ore prices have been under significant pressure since mid- March. Clearly the gloomier fundamental outlook is shifting back into focus, which justifies even lower prices in our opinion. After all, supply will continue to exceed demand for the foreseeable future. We envisage further correction potential.