Genesis Rule-Based Investing

GENESIS OF RULE-BASED INVESTING

The genesis of rule-based investing can be traced back to the early days of modern finance theory, when pioneers such as Benjamin Graham and David Dodd began to develop a systematic approach to investing based on fundamental analysis. Graham and Dodd believed that by analyzing a company's financial statements and other key metrics, investors could identify stocks that were undervalued by the market and had the potential for long-term growth.

Over time, other factors such as momentum, quality, and size were identified as important drivers of stock returns. Momentum investing, for example, involves buying stocks that have performed well in the recent past in the expectation that they will continue to perform well in the future. Quality investing focuses on companies with strong balance sheets, stable earnings growth, and other characteristics that are associated with long-term success.

In recent years, advances in technology have made it easier than ever for investors to access large amounts of data and build sophisticated models based on these factors. This has led to a proliferation of rule-based investment strategies that seek to exploit these factors in order to generate superior returns.

Today, rule-based investing is used by a wide range of investors, from individual retail investors to large institutional asset managers. It is particularly popular among investors who are looking for a systematic approach to investing that can help them achieve their financial goals over the long term.

Overall, the evolution of rule-based investing has been driven by a combination of advances in technology and a growing understanding of the factors that drive stock returns. As these trends continue to evolve, it is likely that we will see even more sophisticated rule-based investment strategies emerge in the years ahead.

NJ Asset Management is leading this endeavour in India with our "Built on Rules" ideology as a guiding principle that underpins our investment philosophy and approach. The main core of rule-based investing at NJ is our focus on high-quality data and rigorous analysis by a highly experienced team. We have built a repository of daily factor scores for over 1,500 companies spanning more than 20 years. This database, combined with our in-house data analytics capabilities, provides the foundation for our factor-based strategies across our portfolio management and mutual fund offerings. At NJ Asset Management, rule-based investing serves as a cornerstone of our investment philosophy, ensuring a systematic and disciplined approach to investment management that seeks to deliver value to our investors over the long term.

1930

Benjamin Graham, a prominent advocate of value investing and widely regarded as the "father of value investing," emphasized the benefits of investing in undervalued stocks. His ideas were supported by considerable academic research, which documented the value effect and suggested that value stocks, which are priced below their intrinsic value, provide above-market.

1949

Graham's influential book, "The Intelligent Investor," was published. This book outlined his value investing principles and provided a framework for evaluating stocks based on their intrinsic value and margin of safety. It emphasized the importance of buying stocks at a discount to their intrinsic value. Graham's work laid the foundation for the development of factor-based investment strategies that incorporate the value factor.

1956

The Capital Asset Pricing Model (CAPM) was introduced, which focused on the market risk factor.

1976

Ross developed the Arbitrage Pricing Theory (APT), which became the basis for many commercial risk models, including macroeconomic factor models, fundamental factor models, and statistical factor models.

1990

Academic research on factors expanded, with the introduction of Fama and French's influential three-factor model, which added value and size factors to the CAPM.

1993

The first major academic study of momentum was conducted by Jegadeesh and Titman, who documented price momentum as an investment factor where recent winners continue to win and losers continue to lose.

2012

Robert Novy-Marx introduced the profitability factor, which measures a company's profitability by using the gross profits-to-assets ratio. This factor has been shown to have a significant impact on stock returns .

2014

Fama and French introduced a five-factor model that added profitability and investment factors to the three-factor model. The five factors are market risk, size, value, profitability and investment.