Invesco’s Scott Bennett explains why small caps outperform, the nuance of small caps and why quantitative/systematic strategies can outperform in ASX small caps.
On this episode of The Australian Investors Podcast, Owen Rask speaks with Invesco Australia’s Scott about:
- Why do small caps outperform?
- Factor investing – how strategies are created
- How can a systematic strategy work in ASX small caps?
- Why small cap index strategies are tilted to failure
- Will AI make us worse investors?
Invesco’s Scott Bennett Questions
Scott, welcome to the Rask network. I’d like to begin with a top-down view of how factor investing came into practice. Why, when and how did factor investing catch on?
Why do small cap funds tend to show an increased probability of outperformance versus large caps?
When it comes to small caps, particularly in Australia, one of the advantages or reasons for excess alpha might often be explained by liquidity. This lack of liquidity often means active funds cannot scale to hundreds of millions in FUM, and retain their outperformance; it also makes it nearly impossible to invest in a true passive index for small caps, such as via an ETF. How do you think about this?
Before we dive into the world of systematic trading and factor investing, can you educate us on how you go about creating a systematic or factor-based strategy at Invesco? Specifically, talk us through everything: the nuts and bolts, the tools you use, how you backtest ideas on data, the minimum efficacy requirement, etc. Using the Smaller Companies Strategy as an example could be great.
Why and how does a systematic approach improve outcomes for ASX small cap investors?
Scott, can you talk broadly about the three types of ‘beta beaters’ – Fallen Angels, Zombies and Glamours – and how you use that to inform your strategy?
Why is momentum so much more powerful than, say, value, in small caps?
If you were researching and studying a factor strategy to potentially invest in, what are the key factors of the fund/strategy that you would study?
Do you think tools leveraging AI will improve outperformance potential for systematic strategies? Or will outperformance opportunities be competed away by increased trading activity?
Finally, if you could go back in time and tell yourself one thing about money, finance, business or investing, what would it be?
