Assessing Effectiveness of Factor Investing Strategy in Generating Alpha Returns During Covid-19

Abstract

One of the main challenges before any fund manager is to construct portfolio whose returns over long period of time can beat the returns generated by market index over the same period of time. The predictive ability of fund managers is examined from the excess return or alpha, as termed under Jenson Model of portfolio evaluation. The fund managers who succeed generating higher value of alpha is considered superior in comparison to the one having low or negative value of alpha. With this goal as the main objective, different strategies from time to time are designed and practiced by portfolio managers. The range of strategies can oscillate between different combinations of Active portfolio management strategies to Passive portfolio strategies. Stock markets movements being dynamic in nature cannot be captured through single style of investment strategy and requires consistent manifestation in investment style and tracking so as to generate return in excess of market index. Quite often, one may witness significant movement in the market index but the sector or the stock in which most of the investors/portfolio managers have committed their funds may not witness movement in the same proportion. This reflects that beta of the stocks or the sectoral indices does not remain constant and keep on changing with time. Therefore, it is imperative for any investor or fund managers to keep track of the market and conduct portfolio revision at periodic intervals. In order to have discipline in the investment style, portfolio manager has to adopt a specific strategy. Among the various strategies being followed by portfolio manager, one of the much talked about strategy is ‘Factor Investing’. Under this strategy, specific factors are given consideration to reallocate the proportion of funds in the existing portfolio with a view to generate excess return over market index. The present study aims to examine the feasibility of Factor investing in India Stock markets using appropriate statistical tests on the returns generated by different indices during the period October, 2020 to October, 2021. Appropriate statistical test using SPSS would be employed to draw meaningful conclusion.