The point is that factors have a lot of room, but some of the strategies might not. Some of the more con- centrated smaller capitalisation strategies have an extremely high turnover that can erode the potential benefit of the factors you are incorporating in your portfolio. An interesting dynamic against index factors being in that space is it’s not just my capacity, it’s also State Street’s and BlackRock’s. Anybody can have an index strategy but once it is on the shelf you must keep an eye on aggregate interest in that strategy. That makes it tricky. From a pure market cap perspective, there’s wealth erosion that happens on index reviews. You can see that with price dislocation in the last 15 minutes of trading because of the wealth of assets that are benchmarked there. Factors have a little bit more time before that becomes a problem, but investors should keep an eye out. Trow: Another way of looking at the same thing is with green bonds. You might want to invest in that field, but there simply isn’t enough product out there to satisfy investor demand. Murphy: There has been a proliferation of factor indices as well, and they are all constructed differently. It’s not like there’s separate capacity for ‘factors’, distinct from capacity in ‘active quant’. Both strategies are investing in similar themes and those core factor exposures have been a bedrock of traditional active quant and fundamental strategies for a long time now, but we are a long way off a natural limit.
PI: What is the best way to create a multi-factor portfolio? Murphy: There are a number of ways. It depends on the objective that you are trying to achieve and your willingness to take risk relative to the benchmark. We would look at trying to be risk efficient, such as
September 2019 portfolio institutional roundtable: Factor investing 15
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