SPONSORED FEATURE: Enhance your skill: How active managers are using factor strategies

Just as innovation is driving rapid change in our lives, it is changing how we invest. Many investors are facing challenges because the traditional ways of sourcing alpha are no longer sufficient to help meet investment goals. As asset managers, it is imperative we find and adopt new sources of alpha made available through advancements in data and technology.

One such innovation is factor-based investing, and the development of exchange-traded funds, often referred to as “smart beta”. Factor investing seeks to provide access to broad and historically persistent drivers of returns within and across asset classes, markets and countries, and continues to grow rapidly. It should be noted that the diversification and asset allocation benefits sought by these strategies is not guaranteed, and do not ensure a profile or guarantee protection against loss. In 2016 they experienced global flows of $55 billion and reached an assets under management (AUM) of $330 billion. There are currently 955 smart beta ETFs globally.1

The investment paradigm in the minds of many has shifted, from an approach of investing measured against a strict benchmark, to more outcome-focused investing. Investors, therefore, are placing a premium on managers that actively manage factor exposures and generate returns in excess of what they can earn themselves by holding static factor positions via ETFs.

Against this backdrop, let’s walk through a few examples to demonstrate how asset managers can incorporate factors to express investment views and complement existing holdings.

Express investment views
Economic intuition and empirical evidence show that factor premiums vary over time. Because each factor is driven by different phenomena, they tend to outperform at different times. Our research2 indicates that it is possible to tilt factors and seek incremental return by over and underweighting select factors, relative to others, while maintaining long-term exposure to all factors.

Let’s consider five equity style factors: value, size, momentum, quality and minimum volatility.

For each factor, we consider four indicators (see Chart 1) to determine whether to tilt towards or away from the factor. While each of the four indicators is available on its own, we believe it is more effective to combine these four insights into a composite indicator. This tells us whether to under, over or neutral-weight the factor relative to other factors, while still maintaining exposure to all the factors over time.

1 – Source: BlackRock as at 31st December 2016.
2 – Source: BlackRock and MSCI as at 30th September 2017.

❱ SouRCE: BlackRock as at 31st Dec ember 2016. F or illustr ative purposes only.

Many investors are already engaged in factor rotation, although they don’t necessarily think about it in that particular way. Every time an active manager adjusts an equity allocation to get more defensive – either through sector rotation or country selection – they are also adjusting their factor exposure. Most portfolio managers think in terms of cyclical versus defensive exposures, or emerging versus development, but it is important to recognise that when one modifies those, one is also adjusting the quality, momentum, value and volatility exposures.

Complement existing holdings
Persistent style factors have delivered returns in excess of the benchmarks over time. Nonetheless, there are times when certain factors are in and out of favour and it should be highlighted that these types of strategies do not guarantee returns over time.

Strategies that focus on one or two factors are at risk of underperforming in certain market conditions. Take the value factor, relative to momentum. As shown in Chart 2, excess returns are negatively correlated, highlighting the opportunity of not allocating to a single factor, but combining exposures in an effort to prevent large swings in relative performance.

Why consider factors?
Active management is all about having an informational edge. Through data and technology, factors are now packaged in an efficient wrapper that allows investors to integrate these seamlessly into their investment processes. At the very least, thinking about a portfolio through a factor view may bring new clarity and focus to their process.

BlackRock_chart_2

❱ Source: MSCI as at 30th June 2017. Momentum represented by the MSCI USA Momentum Index, Value represented by MSCI Enhanced Value Index.

Regulatory Information
BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority (‘FCA’), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection, calls are usually recorded.

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority.  Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000.& Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a guide to current or future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially.  Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

For investors in Switzerland
For qualified investors in Switzerland: this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended”.

The iShares ETFs are domiciled in Ireland, Switzerland and Germany. BlackRock Asset Management Schweiz AG, Bahnhofstrasse 39, CH-8001 Zurich, is the Swiss Representative and State Street International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, CH-8002 Zürich the Swiss Paying Agent for the foreign iShares ETFs registered in Switzerland.The Prospectus, the Prospectus with integrated fund contract, the Key Investor Information Document, the general and particular conditions, the Articles of Incorporation, the latest and any previous annual and semi-annual reports of the iShares ETFs domiciled or registered in Switzerland are available free of charge from BlackRock Asset Management Schweiz AG. Investors should read the fund specific risks in the Key Investor Information Document and the Prospectus.

For investors in the Netherlands
Issued in the Netherlands by the Amsterdam branch office of BlackRock Investment Management (UK) Limited: Amstelplein 1, 1096 HA Amsterdam, Tel: 020 – 549 5200”. 

Restricted Investors
This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.

Risk Warnings
Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to current or future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information. Investment should be made on the basis of the relevant Prospectus which is available from the manager.

In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited.

© 2017 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

©2017 funds europe

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