Factor investing: Tough times
Asset owners with factor-based investing exposure are having a tough time. The strat- egy, which is also known as smart beta, is designed to pick stocks that will deliver higher returns than a market cap index, while risk remains low. The problem is that many of these factors have not generated a premium for some time. Indeed, since the start of 2018, the performance of factor and multi-factor products has declined by almost 20%, according to FactorResearch. Yet investors are not being deterred by such a disappointing track record and are instead rushing into these strategies. A smart beta study by FTSE Russell found that 71% of the investors it spoke to own such products, which are typically multi-factor. This is up from 49% in 2018.
Investor bullishness appears to be linked to the marketing message that factor invest- ing generates higher returns over the long term. The diversification angle also appeals. Smart beta offers to complement other strategies by targeting alpha in a different way, be it through focusing on low volatility, value, momentum, size or quality. Yet outperformance is what trustees want, not promises of jam tomorrow. They are a cautious bunch and so it is natural that a few months of underperformance may make them question if their capital would be better off somewhere else. Afterall, they are pay- ing for what is billed as being somewhere between passive and active management at a time when mirroring a market cap index would probably have proved more profitable. While factor-based investing is an easy concept to grasp, it is difficult to implement. This makes the move out of its traditional home of equities into fixed income, where de-risking schemes are allocating more of their capital, all the more interesting. How it is helping investors to cut risk and earn a return in the bond markets is one of the areas discussed in the following pages of this supplement, which looks at why investors should have factors in their portfolio.
Mark Dunne Editor, portfolio institutional
Contents P4:
Factor
investing
roundtable
We sit down with trustees, asset man- agers and a consultant to find out if investors should stick with factor-based strategies.
P22: Who wants an Apple the size of Australia? Aon’s Andy Peach makes the case for factor-based investing being an alterna- tive to passive investing.
P24: Responsible investing: factor friend or foe? David Barron at LGIM looks at how responsible investing fits into a factor- based portfolio.
P26: The factor effect in corporate bonds Robeco’s Patrick Houweling looks at how the benefits of apply to corporate bonds.
factor
P28: Answering a growing need Yvette Murphy at State Street Global Advisors looks at how to combine smart beta with ESG.
P30: Feature: The next challenge Factor investing
is moving into fixed
income, but, asks Elizabeth Pfeuti, are investors ready?
investing
September 2019 portfolio institutional roundtable: Factor investing 3
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