Factor investing is fundamentally a data-driven strategy that identifies securities with specific characteristics likely to drive returns. It depends heavily on quantitative data. However, the reliability of these strategies hinges on the quality of the underlying data. The entire investment strategy can collapse if the data is compromised due to poor governance, fraudulent reporting, or manipulation.

This is where forensic and governance analysis becomes indispensable in fortifying factor-based models. While factor investing traditionally leans on quantitative data, forensic and governance analysis often involves qualitative dimensions, such as assessing management integrity, and governance policies, or identifying red flags in corporate behaviour. Bridging this gap between quantitative and qualitative measures is challenging, but it is critical for building robust factor models.

A notable example is Yes Bank*, which once appeared attractive in traditional factor models due to high growth and profitability metrics. However, deeper forensic insights, such as aggressive lending practices, poor governance, and questionable asset quality, could have acted as early warning signals. By factoring in governance data, investors could have avoided exposure to the risks that later became evident.

At NJ AMC, we have taken on the challenge of transforming qualitative forensic and governance insights into data-driven inputs for factor investing. By embedding robust forensic and governance analysis into our models, we ensure to filter out companies with potential governance issue or financial red flags.

*Note: The above should not be construed as a recommendation to buy/sell any stocks specified above. The above content is based on the internal research process. The AMC may or may not hold the above stock in its portfolio. Investors should consult their own advisors, and tax consultants before making any decision.