PLANADVISER - November/December 2017 - 24

trendspotting
Focus Needed for Factor Investing
'Way too much product and a lot of confusion'
" IN factor-based investing, institutional
investors look at the sources
of risk and return behind securities'
prices-what are the true drivers of
risk and return? " says Don Robinson,
CEO and chief investment officer
(CIO) of Palladiem LLC, an investment
management
firm that
serves
the
adviser community.
For example, for bonds, factors that
may influence return include inflation
expectation, short-term insulation
based on federal policy, interest rates,
interest rate spreads, performance
over Treasury yield, credit risk and
default risk. Robinson says there are
fewer factor-based products for bonds,
but he believes the industry will see
more introduced.
Equities have a different set of
factors, which contribute to risk and
returns and have been explained by
academic research, Robinson says.
These include value-e.g., how a stock
is priced today vs. in the next five to
10 years. He says if the stock is very
expensive now, it will most likely
revert
to fair value over 10 years,
and vice versa. Additionally, there is
momentum, which covers irrational
behavior such as investor reaction to
news and chasing of performance-
this consistently extends 10 to 16
months, then reverts back, he says.
Quality is a measure of profitability
for companies-those more profitable,
unsurprisingly, generate higher
returns. Low volatility is another
factor; sometimes an equity has
low volatility because it has been
neglected. And the size factor is based
on the theory that investing in risky
smaller companies can pay off.
" Today, because of the rapid move
of big data and technology, investors
can slice and dice factors, " Robinson
says. " There is way too much product
and a lot of confusion. "
Matt Peron, managing director of
global equity at Northern Trust, says,
years ago there were many institutional
investors who needed help
with active management and found
that smart beta failed to work as they
had expected. Northern Trust offered
services to review data and found
people generally had an expensive
index fund because of over-diversification.
" If they had 20 active managers,
in theory they canceled each other
out, " he says. " This led to lots of unintended
risk and impure implementaTALKING
POINTS
Keeping the Faith
A scant 1.1% of defined contribution plan
participants stopped contributing to their
plan in this year's first quarter, according to
recently released data from the Investment
Company Institute.
Financially Stressed Out
PwC says there is
a great need for
financial wellness
programs, as 53% of
workers feel financially
stressed. For a company
with 10,000 employees,
this stress costs
$3.3 million a year in
lost productivity.
24 | planadviser.com november-december 2017
tion of factor exposure. "
According to Robinson, rigorous
application over 45 years has found
that value, momentum, quality, low
volatility and size will explain more
than 95% of performance and risk.
" Anything else is just noise, redundant
application, " he says. The industry
needs to educate investors about how
factor investing works, he recommends.
-Rebecca Moore
http://www.planadviser.com
PLANADVISER - November/December 2017

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