SEEKING OUT-PERFORMANCE USING MULTIFACTOR STRATEGIES

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.

What are Multifactor strategies and how can they help to enhance the returns of your clients’ portfolios?

Regardless of the market environment, achieving financial goals can be challenging. Today, with increased technological advances and the proliferation of index investing, we are seeing a new wave of products come to the fore: smart beta strategies. In this article, we explore multifactor strategies and how they can help seek enhanced returns within your clients’ portfolios.

The backdrop

There has been $60.4 billion in active equity mutual fund outflows in the past 5 years.1 We believe this is a result of two key factors: performance and fees. Over the last five years, 72% of large-cap mutual fund managers have underperformed their benchmarks. In addition, these large-cap mutual funds are typically charging 110bps in the process.2 Is there an alternative for those looking for above-market returns?

1 Source: BlackRock Global Market Intelligence Database at as 30th June 2018.
2 Source: SPIVA Report as at 31st December 2017.

How can Smart Beta ETFs help?

For those looking to beat the market, Multifactor ETFs provide diversified exposure to a variety of factors to help achieve this. Quality, Momentum, Value and Size are all factors that have been identified as long-term drivers of returns.

On a short-term basis these factors are cyclical (which means that the performance of these factors can change in-line with the business cycle). Pinpointing where we are in the business cycle can be challenging! Multifactor ETFs can be a solution for those who want to gain access the power of factors in a simple one-step solution. These ETFs combine rewarded factors together to generate excess returns, reduce the cyclicality of any given strategy and remove the guesswork of where we are in the business cycle.

MSCI World Diversified Multiple-Factor Index

Let’s take the MSCI World Diversified Multifactor Index as an example, the index outperformed 98% of comparable active mutual funds over the last five years, on a risk-adjusted basis.

Reasons to factors

Past Performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

Source: Morningstar from 01/02/2013 – 31/01/2018. The figures shown relate to past performance. Index returns are subtracted by the total expense ratio of the associated iShares ETF.

Multifactor – How can I
use them?

This case study is provided for illustrative purposes only. The strategies discussed are strictly for educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The fund should not be considered low risk in absolute terms and may not be suitable for cautious investors. Diversification and asset allocation may not fully protect you from market risk.

Investor Challenge

  • An investment advisor managed a portfolio of five actively managed equity funds, across different regional exposures. The investment advisor was under pressure from their clients to lower overall portfolio expenses while continuing to deliver excess return. Two broadly diversified but expensive funds became candidates for replacement.

Potential solution

  • After researching factor investing, the investment advisor considered the benefits of Multifactor strategies.
  • These strategies seek to outperform the broad market indexes, while seeking to maintain a level of risk similar to the broad market. Multifactor strategies carried lower fees than the active funds as well.
  • Similar to the actively managed funds to be replaced, the Multifactor strategies offered diversified sector and country exposures, so the overall risk profile of the portfolio would not change.
Reasons to factors multi factoe strategies & high fee active funds

Source: BlackRock. Illustrative purposes only / Indices are unmanaged and one cannot directly invest in an index.

Target
Seek to improve the risk and return profile of the portfolio, while maintaining a high correlation to the original investment portfolio.

Case study provided for illustrative purposes only. The strategies discussed are strictly for educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

Introducing iShares Multifactor ETFs

The iShares Multifactor Suite track indexes that invest in attractive stocks, while constraining the portfolio to have a similar look and feel as the broad market to ensure these can be core equity investments.

The funds are based on indices that selects stocks that exhibit multiple favorable characteristics (quality, value, momentum and size).

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