PLANADVISER - July/August 2019 - 18

trendspotting
Equity Factor Investing
'Factors' help sponsors shape their plan's liability profile
ident at consulting firm Callan,
says, " Conventional capitalizationweighted
indexes certainly have exposures
to factors, but, for investors who
believe in a factor approach, there are
better ways to home in on them. "
Indexes and portfolios based on
single factors contain hundreds of
stocks but represent only a small fraction
of broad market indexes.
" Over short periods, factors can
show high correlation to one another, "
notes Feifei Li, head of investment
strategy
at
Research
Affiliates,
a
publisher of factor indexes. " When
companies that have a strong quality
factor are doing well and attracting
inflows, they are probably doing well
in momentum at the same time, as we
saw in 2018. "
Individual factors can be fairly
potent and require handling with care.
Momentum strategies call for frequent
trading and thus incur high transaction
costs. Jay Love, a partner in consulting
firm Mercer, points out that value has
been one of the most effective factors
over the long term but has slipped out
of favor in the last eight years.
" Moreover, " says Stahl, " the quality
factor is hard to define, and it might
correlate highly to other factors, such
as value in 2018. "
" There's also the possibility that,
INSTITUTIONAL investors are always
looking for an edge to improve their
portfolio performance. A current candidate
for that edge in equity investing
is the use of factors. Factor investing
brings quantitative rigor to sizing
up the returns of stock markets, to
gauging the success of active managers
and to building distinct portfolios.
There is no consensus as to how
many factors drive
stocks, or how
exactly to define some of the factors,
but their application to equities adds a
new analytical dimension to traditional
equity styles and gives sponsors greater
precision and transparency in understanding
what moves their portfolios.
Over time, financial economists
have identified hundreds of individual
quantitative signals, most of which are
fleeting, but the science has bundled
up the ones that have endured and
grouped them into factors: value,
momentum, quality, company size,
and volatility. Some practitioners also
track factors for dividend yield and
stock liquidity.
As Mark Stahl, senior vice presthrough
crowding and more money
flowing into a given factor, its premium
could erode, " observes Jon Pliner, head
of delegated portfolio management at
consultant Willis Towers Watson.
Dimensional Fund Advisors has
been at factor investing for almost
40 years. " Through our valuation
framework, we find factor premiums
for value, company size and profitability, "
says Marlena Lee, co-head of
research. " Realized returns are 'noisy,'
and sometimes they are negative, but
our framework says investors should
expect
those premiums every day,
and in every market and sector. "
-John Keefe
18 | planadviser.com July-August 2019
Art by Andrea D'Aquino
http://www.planadviserdigital.com/planadviser/july_august_2019/TrackLink.action?pageName=18&exitLink=http%3A%2F%2Fplanadviser.com
PLANADVISER - July/August 2019

Table of Contents for the Digital Edition of PLANADVISER - July/August 2019
